The largely stagnant mergers and acquisitions market is showing signs of life, and financial professionals from metro Milwaukee believe it will continue to improve throughout 2010.
The M&A marketplace was down significantly in 2009 because of the global financial crisis, difficulty in obtaining financing and the poor financial performance of many companies.
As the recession has eased, banks have been increasingly willing to lend and businesses have improved their performance – all of which bode well for the buy/sell marketplace.
A recent survey of members of the Wisconsin chapter of the Association for Corporate Growth shows that 77 percent of professionals in the investment banking, corporate finance and related fields expect an increase in merger activity over the next six months.
“If the recovery is coming, it means that companies would be coming to market not because they have to, as much as it will be owners will be bringing a quality company with good value proposition,” said John Kielich, managing director of Brookfield-based Kolb + Co. Corporate Finance LLC.
In addition to the improving economy, several pressures are helping to increase the number of companies being brought to market now, said Linda Mertz, managing director of Waukesha-based Mertz Associates Inc.
“Buyers with cash realize that in order to grow, they will have to make acquisitions,” she said. “There are company owners that are getting tired – they could have good companies with good profits, but they look forward to what’s happening (politically) and may be concerned about future taxes.”
Ronald Miller, managing director with Cleary Gull LLC, agreed.
“I think the trend is increasing now, but I think it will be weighted toward the second half of the year as companies continue to rebound in front of tax law changes,” he said.
Doug Mitman, managing director with Milwaukee-based Grace Matthews Inc., said the experiences of business owners in the recession will help drive some companies to market.
“A lot of people were really scared in this downturn,” he said. “They’re happy that they survived and are doing better, but they are afraid of where this would leave them if it happened again.”
Most companies that were sold in 2009 were on one end of the performance spectrum – either high-flying firms that could command a premium or companies in a distressed or turnaround situation, Miller said.
“This year, the window is opening for average or more traditional middle market companies,” he said. “The data is dropping on multiples, and that’s because middle market companies are coming back into play. I’ve got four pitches in two weeks. There is an abundance of buyers.”
The deal pipeline at many investment bankers in the metro area has increased and improved dramatically over the last six months.
“The number of prospects calling us and the quality of prospects is significantly better, incredibly better than six months ago,” Mertz said. “There is a big difference in my world now, and I think it will continue to get better.”
Strategic buyers made up the overwhelming majority of the deal marketplace in 2009 – with private equity purchases only accounting for about three percent of the global M&A marketplace last year. In 2005 through 2007, private equity accounted for more than 25 percent of all buyouts.
However, Milwaukee-based and other Midwestern private equity buyers will re-emerge this year, Mertz said.
“They will come back to the table but not as strong as they were,” she said. “Those that will come back will have the cash and will be smart and will be looking for opportunities. But they will be selective to strategic opportunities.”
John Reinke, director of Generation Growth Capital Inc., a Milwaukee-based private equity firm, said his company and several other Milwaukee area private equity firms believe there will be a resurgence in private equity acquisition in the region this year.
“There are dollars on the sideline right now,” he said. “There was a feeling, heading into 2009, that we were standing on the precipice and didn’t know how far we had to drop. In 2010, there’s a feeling like we’re on the ground. It makes it easier to get deals done in that type of environment.”
Private equity investors will have to come back to the deal table in 2010, Mitman said, because of the large amounts of capital that need to be invested or given back to fund contributors.
“The money’s still there. It just had to take a little vacation,” he said. “It was so hard for them to be competitive (last year). There was no debt.”
In its recent discussions with financial institutions, Generations Growth Capital has seen more willingness to lend for M&A deals, which could be a sign of continued improvement in the deal marketplace this year.
“From our experience in the credit markets, they’re going to be there for the good deals,” Reinke said. “We’ve got a long track before credit is going to be loose enough to drive valuation changes – banks aren’t going to be funding collateral airballs anytime soon. But for moderately structured deals that have components of equity backing them, banks are going to be playing for those types of transactions.”
Miller has had similar recent dealings with banks that seem to be increasingly willing to lend for buyouts. As the economy gradually improves this year, as many expect it to, the deal marketplace will also improve, he said.
“The worst thing for my business is volatility,” Miller said. “The consensus view is that the economy is improving and if we have a shared vision of the future, we can reach an agreement on deals.”