Southeastern Wisconsin merger and acquisition activity has been robust for several years, helped along by increased business confidence and high valuations. And there’s no sign those factors will change anytime soon.
That follows the national data, which has pointed to higher than average M&A activity and sky high valuations of late. According to a report from Deloitte on 2018 U.S. M&A trends that surveyed 1,000 U.S. headquartered corporation executives and private equity firms in September, 68 percent of executives and 76 percent of private equity firm leaders expect deal flow to increase in the next 12 months. And 63 percent of respondents said deal size would increase, while 34 percent said it would stay the same.
“Everyone seems to be reasonably busy,” said Paul Stewart, co-owner of Milwaukee private equity firm PS Capital Partners LLC. “The caveat is that valuations are still remaining robust in terms of the value of companies and the pricing in the marketplace.”
That’s a challenge for buyers like PS Capital, but a boon to business owners seeking to sell.
There are still more buyers than sellers, which means hungry buyers are competing for relatively few deals, driving up the valuations of the companies that are for sale.
There have been more buyers than sellers for about three years, driven in part by the large amount of capital chasing deals, particularly by private equity firms, and companies seeking growth in a modestly growing U.S. economy, said Robert Jansen, managing director at Milwaukee investment bank Bridgewood Advisors Inc.
“Much of the M&A activity in recent years has actually been driven by proactively generated deals, which means approaching companies that aren’t being represented for sale yet,” Jansen said. “Our advice for the business owners we meet with… is to go through that exercise of planning for that preemptive offer.”
Despite expectations that a wave of baby boomers would begin to sell their businesses and retire over the past five years, the big wave of sales from that generation still has not come through in the Milwaukee market, Stewart said.
One factor that may be delaying boomers who are in their 70s is people are living longer and retiring later, Stewart said.
“The other item that I think has been pushing it out is the economy has been steadily going in a positive direction for a few years now and it is getting better,” he said. “As a result, the ability of a company to make money is a lot more predictable or comfortable.”
Steven Peterson, managing director at private equity firm Brass Ring Capital in Milwaukee, said he’s just starting to see baby boomers come to market.
“It’s been a sellers’ market for a while and it just seems like it’s more and more every year,” Peterson said. “At some point, that’s got to change. Life stage considerations are driving a lot of people more and more.”
“Business owners that maybe didn’t sell during the downturn needed to wait to build their EBITDA back up and for the buyer population to get there again now is perhaps reaching the point where they need a succession plan for their business,” Jansen said.
Valuations nationally are as high as 15 times EBITDA, Peterson said. Locally, it’s about five to seven times EBITDA.
Stewart has seen valuations well above five times EBITDA over the past couple of years, he said.
Of course, each deal is different and valuations vary widely, depending on factors like the industry, size of the transaction, how the business is marketed and how aggressive the buyer wants to get, Jansen said.
And since buying a company comes at a premium, buyers are even more discerning about what makes a good buy, Stewart said. Customer, geographic and product concentrations are factoring in heavily.
Some companies seeking acquisitions are even starting to take a more global view as they seek growth, Jansen said. He’s approached companies in Africa, South America and Europe as targets for three of his clients.
PS Capital Partners’ eight portfolio companies, which span eight different industry segments, all either met or exceeded their plans for 2017, and the plans for 2018 are all greater than they were in 2017, Stewart said.
Brass Ring’s five portfolio companies also had a great year and expect an even better 2018, Peterson said.
Buyers and sellers are also carefully evaluating the impact of factors such as the federal tax reform bill, though it’s not entirely clear yet how it may impact them.
Looking ahead, all three experts agreed there are no obvious impediments to the continuation of the frothy M&A market, save for a major global event.
“It’s hard to foresee any particular thing driving the markets down at this point,” Peterson said.