Milwaukee-area merger and acquisition activity has picked up so far this year, according to several local private equity firms.
“In terms of number of deals closed, quality of deals, we’ve got a strong economy,” said Tom Kintis, president of CGK M&A Advisors in Waukesha, which has completed six deals this year, versus five last year, and already has two in process for 2016. “The quality and the flow is so good, I’m actually getting pickier.”
Conditions remain favorable for sellers, as a slew of investors are searching for quality companies and the market remains frothy, driving up multiples.
“Prices for private companies are still very high,” said John Emory, Jr., president of Emory & Co. in Milwaukee, which focuses on lower middle market deals. “Private equity groups are dying to buy. It’s very hard to find quality companies for sale.”
“There’s probably more money chasing deals than there are good deals out there,” said Steve Balistreri, managing director at Blackthorne Partners in Brookfield, which has closed two acquisitions and sold one of its portfolio companies so far this year. “That’s why multiples in these transactions have increased.”
But buyers also have their advantages, with banks eager to lend and offering more favorable terms than in prior years.
“Just like the dry powder in private equity, the banks have money to lend,” Kintis said. “Banks are coming to us saying, ‘We’ll give you longer term, we’ll give you lower interest rate, and the covenants are minimal.’”
The companies that buyers want to acquire are also performing at record levels.
“We’re seeing a strong market so far this year,” Emory said. “Many companies are having record profits this year and had record profits last year, but are beating that this year.”
Considering the conditions, it’s surprising more sellers aren’t on the market, Emory said. That could be for two reasons: the Great Recession caused business owners to be more cautious; and the recent fluctuations in the stock market could have spooked sellers who want to reinvest the proceeds.
“That’s been a major headwind to people selling their businesses is the business owner’s concern about what they would do with the proceeds from the sale,” he said. “What are their reinvestment options? Ironically, they view 100 percent concentration in their business as less risky than holding a diversified portfolio of publicly traded investments.”
The market’s downturn could have shaken confidence more generally, but it’s too soon to tell how or whether that might impact deal flow, Emory said.
“There’s been a big drop in the public markets and it remains to be seen how that will impact private company markets, but they’re tied together,” he said. “Private companies tend to lag the public markets in their response time.”
On the investor side, the stock market dip has some deciding to invest in local companies rather than in the stock market, Kintis said.
“We don’t have a fund, but we raise money on a deal-by-deal basis from our investor group,” said John Syburg, managing director at Blackthorne Partners. “I think a lot of those people are interested in those private investments because they’re not liking some of the volatility they’re seeing in the public markets.”
Kintis has noted the average age of those selling their companies has been rising as people work longer, with sellers in their 70s rather than their 60s.
Most advisors expect deal flow to continue at the same pace, as interest rates and conditions are likely to hold steady.
“I think because of the election, 14 or 15 months out, I don’t think a lot’s going to change next year,” Balistreri said.