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Pent up demand should help propel mergers and acquisitions activity in 2012, with most experts expecting a moderate to significant increase in completed deals.
“I expect a lot more than 2011,” said Thomas Kintis, president of CGK M&A Advisors in Waukesha. “Banks have settled down. A lot of buyers who were on the sidelines over the last year and a half are at the table looking.”
There are far more buyers looking for acquisitions than there are quality companies for sale, so Kintis expects a feeding frenzy when an attractive company enters the market.
Private equity firms are aggressively seeking medium and large business acquisitions to add to their portfolios, Kintis said.
“There’s a lot of dry powder in private equity right now,” he said.
CGK is already booked to have a better year in 2012, with about seven deals in the works. The firm completed five deals in 2011.
Both public and private companies are performing well overall, so 2012 should be the strongest M&A year since the Great Recession hit, said John Emory Jr., president and CEO of Emory & Co. LLC in Milwaukee.
“There are lots of buyers with lots of money, including strategic buyers for operating companies, which have record amounts of cash and less debt than typical as they’ve been paying down debt through the recession,” he said.
The oldest members of the baby boomer generation are beginning to reach retirement age, but many have been waiting to sell their companies until the market stabilized, Emory said.
“A lot of people would have wanted to sell in the last three years but it wasn’t a good time,” he said. “It’s not just going to drop like a bomb, but yes, demographics favor an increase in M&A and that should keep increasing over the next 20 years.”
Sellers’ confidence in the public stock market is closely related to M&A activity, and both seem to be rising, Emory said.
Those who have been waiting to sell a company are likely to have EBITDA multiples that are the same or better than before the recession because they cut costs and increased efficiency during the economic downturn, said Doug Marconnet, managing director at Bridgewood Advisors Inc. in Milwaukee.
“Companies are realizing they can’t be all things to all people and as they pare down and focus on their core, we’re seeing more divestitures,” he said. “This is the time to sell. They can get good value now.”
Private equity companies are looking to sell older portfolio companies and raise new funds, said Robert Jansen, also a managing director at Bridgewood.
Bank lending has also loosened up over the last two years, which could mean more completed deals, he said.
“(But) there’s still probably a healthy aversion to risk,” Jansen said.
Jansen and Marconnet both expect a robust and active M&A market in 2012 as all these dynamics work together.
Barring any economic or political instability, Rich Silverthorn expects M&A deal activity to continue moderately increasing.
The waters are not completely calm, with continued high unemployment and concerns about European markets, said Silverthorn, an attorney at Whyte Hirschboeck Dudek S.C. who focuses on M&A and corporate transactions.
“I think buyers and sellers are always out there and… it’s just kind of getting the right environment for the two to come together,” he said. “The single most important factor in marrying the two is purchase price.”
As long as the seller can show a good earnings track record and the market remains relatively stable, M&A activity should be about the same as in 2012, Silverthorn said.
“Based on the way things are going, I’m not seeing any major hiccups in the reasonably near future,” he said. “But something could change a month from now and that could change the whole game.”
Vicki Fox, managing director at Milwaukee-based Eisen Fox & Company, is also cautious to predict significant M&A growth in 2012.
The stock market has been up and down, so investing the funds from a business sale could be tricky, she said. There also aren’t enough good sellers on the market at the moment.
But businesses seem to be performing better, which bodes well for readiness to sell.
“There’s a lot less distressed activity out there. It’s generally more healthy companies that have been performing well,” Fox said.
One factor that could push companies over the edge to sell is the expected expiration of a low capital gains tax rate at the end of 2012, she said. And if an owner wants to sell in 2012, January is the time to start.
“If you sell now, by the end of the year you know what the tax rates will be,” Fox said. “They’re looking at improved earnings, which is a good time to sell a business.”
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