M&A market remains strong

Throughout 2010, the mergers and acquisition marketplace, particularly the middle market, has seen a significant rebound from the lows realized in 2009, during the height of the Great Recession.

According to the July Global M&A Monthly report released by Milwaukee-based Robert W. Baird & Co. Inc., there were 3,314 middle market transactions closed between January and July, a 77-percent increase from 2009.

The latest Merger Tracker report by Chicago-based William Blair & Co. shows a more than 55-percent improvement in middle market transactions for the first six months of the year.

Many analysts predicted a strong M&A market this year, fueled by economic recovery, the impending expiration of the Bush tax cuts and increases on capital gains tax rates in 2011.

Although several Milwaukee-area investment bankers and M&A advisors said their firms have seen a rebound in business in 2010, some are forecasting an even busier 2011, even with higher taxes for business owners.

“There’s some counter-intuitiveness to it,” said Ron Miller, managing director with Milwaukee-based Cleary Gull Inc. “We’ve had a couple of transactions that were race to year’s end, driven by tax considerations. But the flood of year-end deals in the middle market has not occurred.”

Doug Mitman, managing director with Milwaukee-based Grace Matthews Inc., said his firm is working on several transactions with privately held businesses that are trying to close by year’s end to take advantage of the current tax laws. However, the firm believes it will be busier next year because of the amount of new clients it has brought on recently.

“We’ve signed more new clients in the last few months than we ever have in our history,” Mitman said. “And a lot of them aren’t going to close this year.”

The changes in tax law have not been much of a driver on the smaller end of the middle market because of the depressed value of many companies, said Stan Johnson, president of Milwaukee-based Anderson/Roethle Inc.

“The erosion of EBITDA has negated the benefit of taking a profit now and (selling) because of capital gains,” he said. “The tax rate (increase) has to be enough to offset the loss of multiple.”

However, Linda Mertz, managing director of Waukesha-based Mertz Associates Inc., is not as confident about 2011 as Mitman or Miller, even though her firm has a strong pipeline of deals to work on for next year.

“I don’t see the visibility. It doesn’t feel as jelled or as certain as it has been in other years,” she said. “It’s from reading the newspapers, seeing all of the uncertainty that’s being talked about. As I talk with clients and prospects, there are some of them who want to wait a bit and see what happens.”

Johnson agreed, saying, “I think that the influx of new clients is going to continue to be tempered by the economic conditions.”

Waiting may work to the advantage of some companies that are sitting on the sidelines.

Some middle market companies have seen improved financial performance in the second half of this year, which should allow them to command a higher multiple with a future sale, Miller said.

“The projected improved performance in the next six to nine months is more powerful than a potential 10 percent change in taxes,” he said. “I expect 2011 to be an extremely strong year. Hence, we’re working hard now.”

Mertz said many of the companies that have survived the recession have significant cash reserves, and some of them are beginning to look to acquisitions as a growth strategy because of the sluggish economy.

“Some of the companies that are treading water will have to grow because their cost structure will go up – health care costs, taxes and raw materials will go up,” she said. “The companies that have cash are deciding to be more proactive with acquisitions.”

Some of those acquisitions are taking much longer to occur than in the past, Miller said. Cleary Gull now regularly spends three to 12 months with some clients before a decision is made to enter the marketplace, Miller said.

“(Clients) are coming in, saying this is an interesting market, help me figure out what I should do,” he said. “We’re partnering with clients much sooner and working with them much longer.”

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