Buyers outnumber sellers

There’s a lot more demand from buyers in the local mergers and acquisitions market than there are companies willing to sell, and experts don’t expect that trend to change anytime soon.

Pent-up demand from private equity groups who raised funds before the recession, as well as corporations with a store of cash earned over the last several years, are driving the trend.

“There’s so much money out there looking for a home,” said Steven Peterson, managing director of Brass Ring Capital, a private equity firm in Milwaukee.

The biggest contingent of sellers is baby boomers who would like to retire or change careers and have waited out the recession, analysts said.

The M&A market picked up in the first half of the year, with companies in some sectors regaining confidence and coming back to the market following a long drop-off starting in late 2008, Peterson said.

“About a year ago, the market got frothy again in bigger deals,” he said.

Brass Ring has seen a 30-percent increase in deal introductions this year, Peterson said. While valuations are still lower than in 2007, they slowly recovered through the first half of the year.

However, economic uncertainty and political debate over the national debt ceiling in the third quarter have given some already cautious sellers pause and kept the supply of available businesses low.


“Right now, I think the market’s a little bit rudderless,” Peterson said.

He expects the same volume of M&A transactions in the fourth quarter, with valuations remaining flat.

Linda Mertz, owner of Rubicon-based strategic M&A consulting firm Mertz Associates, has 30 years of experience in the M&A industry. Mertz said she’s never seen such a frothy market available to the sellers she works with.

“What’s really in high demand are businesses that have $5 million or more in EBITDA (earnings before interest, taxes, depreciation and amortization) that were not hit by the recession and that are growing,” she said. “Multiples have gone up on those businesses. They’re worth more money.”

There still are not enough companies in that middle market description that are interested in selling to fill the demand, Mertz said.

Companies with lower EBITDA, at $2 million or less, are tougher to sell because they were often hit harder by the economic downturn and must do more to prove their value to buyers, Mertz said.

Buyers have shifted away from focusing on the size of the company as an indicator of returns and toward smaller companies with a stable cash flow or companies that are growing, she said.

She expects the local M&A market to remain slow in the fourth quarter as sellers shore up to add more value to their companies.

“Company owners are slower to make decisions than they used to be, and I think that an increased number of company owners want to make their business more valuable before they’re ready to sell it because they did see some erosion in value,” Mertz said.

New normal

Thomas Myers, a mergers and acquisitions attorney at Milwaukee-based Reinhart Boerner Van Dueren S.C., said companies need some time to get used to their new normal in terms of sales numbers.

The market is unlikely to return to 2005 or 2006 levels anytime soon, so companies need to adjust their expectations, he said. When that happens and there are more companies willing to sell in the current market, the supply-demand disconnect will likely be less severe.

Mike Klinker, a shareholder at Milwaukee law firm Whyte Hirschboeck Dudek S.C. specializing in corporate transactions and business acquisitions, said the firm has seen three times the volume of M&A transactions this year as in 2010.

Those transactions are smaller and more strategic than before the recession and are usually based on personal life timing for business owners, he said.

For baby boomers who had planned on retiring during the recession, 2011 has presented a promising M&A market, said John Emory Jr., president and CEO of Milwaukee investment banking firm Emory & Co. LLC.

“There’s a demographic pressure in favor of company M&A transactions as the baby boomers age, and because so few companies were sold during the recession, there’s sort of a pent up demand for people who want to sell,” he said. “Now might not be the perfect time, but it’s a good enough time.”

Emory expects the market to remain fairly neutral in the fourth quarter, but to significantly pick up in 2012 as buyers try to complete transactions before federal long-term capital gain taxes increase in 2013.

Private equity firms that raised large funds prior to 2008 have been waiting out the recession, but may have to spend the capital within five to seven years and are nearing that investment horizon, said Ron Miller, managing director of Milwaukee-based investment banking firm Cleary Gull Inc. For this reason, they are eager to invest.

“There’s still many pools of private capital that are out there, and they haven’t been able to deploy all their money,” Miller said. “It’s a very good M&A market for sellers right now.”

Many corporations have reported solid earnings for the last couple of years as they reduced spending and increased efficiencies. Some corporations now have excess cash on their balance sheets, so they also have money to spend on acquisitions, Miller said.

Prices are better than two years ago, and the volume of transactions has gone up on the local market this year, though not enough to satisfy demand, he said. Miller expects the fourth quarter to remain the same.

“I think it’s a good market, but given the (economic) concern, I see it holding steady,” he said. “For the next 18 months, through the end of 2012, it’s going to be a good time for M&A.”

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