While recent national headlines may have cast doubt on the short-term prospects for several large buyout deals, the mergers and acquisitions market in metro Milwaukee remains strong. Buyouts in the United States hit about $1 trillion during the first six months of the year, according to Dealogic, an investment banking research provider.
Many insiders, both brokers and private equity investors, believe the current deal pace will remain highly active well into 2008.
“Our clients are still achieving exceptional values,” said John Beagle, managing director with Grace Matthews Inc., a Milwaukee-based investment banking firm. “The level of activity remains as strong as it has been for the last couple of years.”
Stan Johnson, president of Anderson/Roethle Inc., a Milwaukee M&A advisement firm, agreed.
“It’s better than it was last year, which was significantly better than the year prior,” he said. “We’re working on seven projects right now, and we have two or three that are teetering on the edge.”
Chris Zuzick, managing director of the Brookfield office of Cornerstone Business Services Inc., also agreed.
“It’s definitely robust,” he said. “In our office we have eight deals that we’re working on now. Definitely, in the small to mid-sized market segment, this has been a good time in the last two years.”
Emory & Co., a Milwaukee investment bank, expects to close six to eight deals by the end of the year, near its levels for 2006, said Victoria Fox, managing director. And 2008 looks just as good.
“Our pipeline – the sheer number of companies talking about selling now – it’s impressive,” Fox said. “The offers and feedback we’re getting are still higher than our expectations. There’s so much private equity out there and strategic buyers with interest.”
Linda Mertz, managing director of Waukesha-based Mertz Associates Inc., said her firm is seeing the same level of activity it did last year, which is at or near record levels. However, she doesn’t see additional growth in the M&A market now.
“I think the market has peaked and we’re in a plateau,” she said. “But I do not see in the foreseeable future that it is going down. Interest rates have inched up. Ten year (treasury) notes and short-terms are up. But banks are still giving away money. But a lot of the money that is buying businesses is not bank money.”
Even if the market plateaus, companies will be buying and selling themselves in high numbers, Mertz said. And while a slight decline would look like lower volume on paper, the deal market would still be near record levels.
Mason Wells, a Milwaukee-based middle-market private equity firm, believes that the U.S. economy will slow down in the next 12 to 24 months. But it doesn’t believe that there will be much effect on private equity investment, said Thomas Smith, one of the firm’s managing directors.
“The volume of dollars thrown into the private equity space continues to grow significantly,” Smith said. “Regardless of a slowdown overall, (we see) no significant drop off in M&A activity.”
However, there are threats to the deal market – the largest being the prospect that banks become less willing to lend to private equity or strategic buyers, or if federal legislation is passed that places higher taxes on private equity investors. While these threats don’t show signs of slowing down the deal market in the next six months, they could complicate things in the next 12 to 24 months, experts say.
Changes that could occur with the November 2008 national election could throw cold water on the deal market, Beagle said, largely because of some Democratic proposals to place higher capital gains taxes on private equity earnings.
“That’s throwing a bucket of cold water on the economy, especially on buyouts,” he said. “The Democrats have made no secrets about going after capital gains rates. If we get a Democratic Congress and president, I see capital gains rates rising. A lot of business owners may look at a sale prior to that to take advantage of the historically low capital gain rates we have now.”
While there have been a handful of private equity deals that have not gone as planned on the national stage, Mertz believes some “big busts within private equity” are on the way in the next five years.
“We will have a sensational big deal that will bust,” she said. “It’s going to be a sobering event. Mainstream, middle-market M&A has its ups and downs, not nearly as high as at the end of the spectrum.”
Like Mertz, Bill Krugler, managing director with Mason Wells, sees some failures looming in the private equity world in the next several years.
“You’ll see some shakeouts,” he said. “There are a lot of the new entrants that fall by the wayside, they get caught when there’s a downturn. They don’t raise a next fund. And you’re only as good as your last fund.”
If some businesses don’t do as well under private equity ownership, those private equity groups could be vulnerable to lower returns, if they’ve taken a higher equity stake, Johnson said. And that could make things more difficult for those groups when they want to raise their next fund.
“If you’ve got to put more money in and the return is lower, and if you have a certain size parameter, you might have fewer deals,” Johnson said. “Their investors will start to get a poorer return on their money invested in the fund. And maybe some of the money starts going to bonds or something else.”
If investors start walking away, the deal market will suffer, Mertz said.
“Private equity drives the M&A market,” she said. “And the ability to raise money drives private equity.”
However, Mason Wells remains optimistic about the opportunities it and other private equity players have in Wisconsin and the Midwest, Krugler said, largely because of the many family and privately-owned companies based here.
“You read more about the mega deals, but we find more opportunities with private or family companies,” he said. “Those that are struggling with global competition, that’s where private equity is able to step in and help them focus on the right end markets.”
Mason Wells’ Buyout Fund 2, which raised $300 million, has invested about $100 million so far in four firms. That fund is expected to be fully invested over the next three years, said Kevin Kenealey, managing director.
Mason Wells expects to pre-market its next fund, tentatively named Buyout Fund 3, in early 2009, Kenealey said.
