M&A market picks up steam

The mergers and acquisitions market has continued to pick up steam since mid-2010, and many analysts predict that 2011 and 2012 will have robust levels of activity. While many of the headlines in the M&A marketplace are dominated by multi-billion dollar deals, the small to middle markets are seeing robust activity this year. Signs indicate that the activity will continue for some time.

Many business owners who missed out on the last cycle in the M&A industry feel that now is the time to begin the sale process, said Ken Evason, CEO and chief investment officer with Waukesha-based Windermere Wealth Advisors LLC.

“The last couple of years absolutely scared a lot of people,” he said. “Many of them are going to sell in the next four years to lessen their exposure. Recaps, ESOPs, sellouts, mergers and transitions are a powerful thing in the minds of a lot people.”

Interest rates are still relatively low and banks are increasingly willing to finance M&A transactions, which are also helping to boost the marketplace, Evanson said.

Many businesses also have a more positive story to tell than they did even six months ago, said Scott Fiducci, an attorney with Brookfield-based Davis & Kuelthau, who specializes in M&A services. A track record of profitability over three or more consecutive quarters is helping tip some buyers who were leery of businesses that suffered during the recession, he said.

“Buyers are feeling more comfortable at evaluating a target’s prospects and performance in the future,” Fiducci said. “That’s been helping to bridge the divide of sellers’ expectations for valuations and what buyers have been willing to pay.”

Valuations have not improved across the board during the last 18 months. However, companies with growing balance sheets in growth industries like manufacturing and distribution have seen significant improvement, both Fiducci and Evanson said.

“All buyers are being fairly disciplined in their modeling, but multiples have started to increase for good companies,” Fiducci said. “There is a lot of capital out there that wants to be deployed desperately, but it will only be deployed smartly. Certainly the competition has heated up for the good targets.”

James Gettel, managing director with Schenck S.C., said the M&A market in Milwaukee is benefiting from these trends.

“Right now the most active area in the United States for acquisitions is the Midwest,” he said. “Many buyers are targeting businesses in industrial manufacturing, trucking and distribution, business services, health care, and life sciences. Companies with a proprietary product or niche are particularly attractive, as are businesses with opportunities to grow through increased marketing, process improvements, enhanced operations, or other means.”

Fiducci agreed, and said the healthy banks in metro Milwaukee have stepped up their lending for M&A transactions in recent months.

“The upper Midwest is a very dynamic area right now,” he said. “Manufacturing is an area where we see a lot of interest from private equity groups and synergistic buyers that might not be located here. (Banks) have taken a keen interest in the lower middle market and are actively pursuing transactions where the underwriting makes sense. That is driving a lot of transactions to be structured as recaps. And there is an expectation that substantial equity will be involved.”

Evason, Gettel and Fiducci were featured as professional advisors on a panel at the BizTimes M&A Forum held May 26 at the Pfister Hotel.

Key topics covered at the forum included why now is a good time to begin transitioning your business for sale, techniques for building value in a company well before a sale, what recapitalizations are and why some business owners might want to consider them, and more.

The keynote speaker was Kevin Conroy, president and chief executive officer of Exact Sciences Corp., a Madison-based developer of diagnostic tests for colorectal screenings. Exact Sciences is publicly traded on the Nasdaq exchange under the symbol EXAS. Conroy spoke about his experiences with publicly traded companies and start-up technology firms, several of which have been acquired.

A second panel discussion featurefd business executives who have recently been on the front line of M&A transactions:

  • Mike Harris, president of Patina Solutions. Harris also founded Jefferson Wells in 1995, which was acquired by Manpower International in 2001. Both of the companies that Harris has founded have been backed by venture capital investors, who earned more than $300 million on about $9 million in invested capital.
  • Tom Campion, managing director of Merit Capital Partners, a Chicago private equity investment firm.
  • Kent Tabor, president and principal of Hartland-based EmbedTek LLC. Tabor was founder, president and CEO of Granite Microsystems, which he sold in 2002. He founded EmbedTek the same year – and sold a majority share to Lake Forest, Ill.-based Brunswick Corp. Tabor later bought his company back in 2004. In 2010, he brought in three new partners as investors and managers to help grow the business.
  • John (JT) Shinners, CEO of JTS Direct, a specialty printing company in Hartland. Shinners recently completed a recapitalization of his company with Milwaukee-based PS Capital Partners Inc.

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