Experts predict robust M&A market

Industry experts to be featured in the upcoming BizTimes M&A Forum are expressing confidence in the outlook for the mergers and acquisitions market.

The BizTimes M&A Forum will take place on Friday, May 3, at the Pfister Hotel in downtown Milwaukee.

While M&A activity was slow in January, it picked up for the rest of the first quarter and will likely continue at a robust pace for the remainder of 2013, said Howard Lanser, managing director at Robert W. Baird & Co. Inc. in Milwaukee. Lanser will serve as keynote speaker at the M&A Forum.

A rush of deals at year end aimed at taking advantage of 2012 tax conditions meant there wasn’t much focus on developing a pipeline of deals for early 2013, he said.

But now, things are picking up because of an combination of good deal conditions: private equity firms are sitting on hundreds of billions of dollars in uninvested capital; credit markets are favorable; companies that cut the fat during the economic downturn have extra cash on their balance sheets; and there is some pressure from board rooms for CEOs to drive growth in an anemic economic environment.

“Conditions are incredibly ripe, and we’ve already seen activity pick up substantially,” Lanser said. “We expect a flurry of activity in terms of deals coming to market late spring, early summer.” Those transactions would likely close in the third and fourth quarters.

This year is likely to model 2010, which started out slow but ended with a bang, he said. There is a lot of cash on the sidelines and available through the leveraged loan market.

“The pressure to grow is there,” Lanser said. “This is the ideal time to look at geographies, business units or competitors that you’ve had your eye on for some time.”

There is a scarcity of assets available right now for middle market deals under $1 billion, so buyers are clamoring for acquisition opportunities, he said. As a result, Lanser has seen an uptick in valuations since 2012.

“It’s a good time to be in the market period, as a buyer and seller,” he said.

But he cautioned that large cash positions can lead to overconfidence and cause CEOs and lenders to take aggressive actions. Some deals are being modeled for perfection, which can create liquidity problems if projections don’t come through.

“With all the liquidity that’s out there, both on balance sheets and in leveraged markets, that’s how you get these over-exuberant markets like we saw in 2007 and 2008,” Lanser said.

The Actuant model

Bob Arzbaecher, chairman, president and CEO of Menomonee Falls-based global industrial firm Actuant Corp., has helped the company deploy about $1.6 billion in capital on acquisitions since its 2000 spinoff from Applied Power Inc.

As a panelist at the M&A Forum, Arzbaecher will provide advice to business owners interested in making acquisitions.

“Really develop a strategy for your business and then identify how acquisitions fit in,” Arzbaecher said. “Get the strategy first and then see how acquisitions play into that strategy.”

Actuant focuses on macro growth themes of energy, infrastructure, farm and food and natural resources that tie into its existing businesses.

Then, use both internal and external resources to source ideas, both traditional and unusual, he said. It helps to meet companies before considering a deal, he said.

Invest the time to create a funnel of deal opportunities, he said. Actuant rates about 1,000 potential deals, then narrows the field to 100 companies it plans to approach.

“We feel like we can be patient because we’re not wed to any one deal,” Arzbaecher said. “There’s another one behind it.”

Finally, develop a good process for integrating acquisitions. That’s where things often go wrong in a deal, he said.

Actuant’s Acquisition Integration Model encompasses team members from Actuant, its subsidiaries and the acquired company to lead the integration effort. The first 90 days are key, he said.

The M&A market is quite robust so far in 2013, Arzbaecher said. There’s a good flow of deals coming from both private owners and private equity groups that want to act on portfolio companies.

Strategic acquisitions are more active than usual, he said.

“I do think people are just taking a fresher look at what they do well,” Arzbaecher said. “In this kind of slow growth economy that we’re in, I think people are just trying to focus on what they do well.”

The valuations he has seen are middle of the road, making the current market good for both buyers and sellers. Multiples are as low as five times EBITDA and as high as 10.

“I think multiples really are a function of the end markets, the growth rates of the end markets, the profits of the business and the cash flow of the business,” Arzbaecher said.

Prime conditions

Steve Balistreri, managing director of private equity firm Blackthorne Partners Ltd. in Mequon, focuses on acquiring companies with less than $1 million EBITDA.

While it’s still early to tell, Balistreri, who also will be a panelist at the M&A Forum, expects a busier year than 2012 in the smaller niche. Blackthorne itself already has two deals in the works, one under letter of intent.

“I think 2012 was sort of a year in transition,” he said. “You had the elections, people were unsure about that, you had uncertainty.”

Like other panelists, Balistreri said it is a good time for both buyers and sellers because of prime market conditions.

Money is inexpensive, the economic recovery is moving forward and companies have right-sized and paid off debt while remaining cautious.

As chairman of the board at Brookfield-based Spring Bank, Balistreri has seen some companies’ cautious behavior firsthand.

“We have credit facilities out in businesses, lines of credit, and people really have been conservative in their use of those facilities,” he said. “There’s a real sense of security not having that obligation out there.”

Companies that are looking to sell in the lower market should spend at least two years preparing the business so it can achieve maximum value, Balistreri said.

“The more time you spend preparing yourself to be sold, the more money you’re going to get,” he said. “You should always run your company like you’re going to sell it.”

Since banks are becoming aggressive in lending again, sellers will have more opportunity to partially finance deals with debt.

The stock market factor

Milwaukee-based private investment firm Lubar & Company had a busy 2012 and expects the same for 2013, said partner Vince Shiely, also a panelist at the M&A Forum.

Groups and funds that own companies are looking to get rid of aging inventory, which has put a lot of quality companies on the market, he said.

It’s a good time to complete deals, since the economy looks pretty good for the next two to three years, interest rates are very low, valuations are increasing and there’s plenty of money available, said David Lubar, president and CEO of Lubar & Co.

“The stock market is at a high and that’s a benchmark for valuations for public companies that carries over to private companies,” Lubar said.

A lot of companies went through difficult times and needed to become stronger, smarter and more committed to their niches in order to make it through the economic downturn, Shiely said.

“The businesses that have survived, you can look back in their financials and see that they have stood the test of time,” he said.

Those businesses can also command higher average multiples, Shiely said.

Sellers can make themselves attractive by making sure they have the right leadership, own a niche, identify growth opportunities and impress the buyer, he said.

Lubar requires that it can talk to the management team before the company even makes a preliminary offer on the business, and encourages the seller to also make sure the investment firm is the right fit.

“We have so few people, our most valuable asset at Lubar & Co. is our time,” Shiely said. “Once we decide to invest time in a transaction, it’s a serious commitment by just about everybody in this office.”

“The prices are right”

Michael Hansen, founder of Milwaukee-based Jacsten Holdings LLC, also will serve as a panelist at the M&A Forum.

Jacsten is a buy and hold company that looks at a potential acquisition’s margins and long-term potential—whether it’s in a stable environment and technology won’t advance to knock it out.

The firm has closed two transactions in the past four months, which Hansen attributed to the surge to get deals done ahead of the capital gains tax increase in 2013.

Some M&A deals may have been pulled into 2012 because of the increase, which meant a quiet start for 2013. But currently, it’s a good sellers market and bank lending has loosened up, he said.

“The Federal Reserve has put in QE 1,2,3 and there’s just a ton of liquidity because of that,” Hansen said. “The banks have access to very cheap money and they’re trying to put it to use.”

Under current conditions, companies are more prone to test the waters to see if it’s the right time sell because the liquidity has helped improve balance sheets.

There are a lot of buyers on the market because of pent-up demand from a quiet market in 2010 and 2011, he said.

“There’s a lot of buyers out there,” Hansen said. “The prices are right.”

If the capital markets hold up and there is a grand bargain of some kind to get the fiscal house in order in Washington, he expects a strong finish to the year.

“If that does happen, I think 2013 and ’14 could be good years, and I’m hopeful that will happen,” Hansen said.

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