M&A

Looking at the state of large-scale merger and acquisition deals and the daily and weekly publications that report on them, it’s easy to think that the Milwaukee area M&A market might be in trouble.

The latest information released by Thompson Reuters states that total deal volume dropped 42 percent during the first half of 2008. Private equity-backed deals have dropped 85 percent across the country during the same time frame.

Daily headlines are dominated by big deals that have fallen apart or were put off because of difficulty in obtaining credit, or the fact that many banks are now hesitant to back the latest billion dollar deal.

However, M&A activity in the small to middle market in the Midwest, particularly in southeastern Wisconsin, isn’t having the same problems. In fact, several Milwaukee-area M&A firms are reporting record or near-record deal flows.

“The mid-market is down, but not nearly as much as last year,” said Ron Miller, managing director at Cleary Gull Inc., a Milwaukee investment banking firm. “I have the same number of deals, of active assignments, as I did at the peak.”

Joe Sweeney, managing director with CFA-LLC, a Milwaukee investment banking, litigation and valuation services firm, agreed.

“We have nine engagements now and we usually do four or five at a time,” he said. “We’re not down 80 percent.”

Emory & Co., a Milwaukee investment banking firm, also is off to a record-setting first half of the year, said Victoria Fox, managing director.

“We just closed the fifth deal of the year and the sixth should close shortly,” she said. “This is normally what we do in a full year. We’re also getting ready to take another (company) to market now. We have another two that are close to LOI. Our activity hasn’t dropped off  and I don’t see it dropping.”

While credit woes and jittery banks have cast a pall on the multi-hundred million dollar and higher market, the middle market in the Midwest is having little difficulty with deal financing.

“The lending environment for the middle market was never in the stratosphere, so the fall or the hit (from the credit markets) on mid-market deals is not as big of a deal,” said Doug Marconnet, managing director with the Pewaukee-based investment banking firm Mertz Associates. “There has been a little tightening and there will be some effect. The smaller transactions will suffer some, but this will not be killing deals. It takes a little more patience and a little more due diligence (to do deals today) but it’s not insurmountable. If you’ve got a motivated buyer and a motivated seller, you can still get the thing done.”

Miller agreed and said that Milwaukee-based community banks have remained relatively healthy.

“If you want less than $20 million at any local bank, they are open for business,” Miller said. “Are they a little more conservative? Yes. Will you pay a higher rate? Absolutely. But they are open for business.”

Mezzanine financing has recently gained popularity in M&A deals around the Midwest over the last year, Fox said, as banks have tightened their purse strings.

“We are seeing a layer of mezzanine financing (in deals now),” she said. “When bank financing was so active just a year or two ago, it squeezed out a lot of mezzanine groups.”

Miller said mezzanine financing has helped some deals get done, despite some banks wanting to contribute smaller amounts to deals.

“That’s allowed purchase prices to remain at attractive levels,” he said.

Several local investment bankers said the prospect of increased capital gains taxes following the November election has resulted in some increased deal flow. However, the likely rise in rates should not make potential sellers panic.

“Anyone who wants to sell by the end of the year needs to be working on it now,” Marconnet said. “But rates will probably not move until 2010.”

“There have been parts during the last six months where (volume) has slowed off, but cap gains are back on people’s minds and some of them want to get a deal done before the end of the year,” Fox said.

A creative investment banker, wealth management advisor, attorney and transaction team will help mitigate any changes in capital gains taxes, said Chris Zuzick, managing director with Spire Capital Advisors LLC, a Milwaukee investment banking firm that launched earlier this year.

“Deals will still get done,” Zuzick said. “We will just have to find a good way to structure the deals. If you structure things properly and everyone gives a little bit, they get done.”

Local M&A activity will likely continue on a healthy pace for the time being, largely because of the many Wisconsin-based privately held companies that have baby boomer owners.

“If you look at the boomers that will exit companies (in the next 20 years), there’s probably $10 trillion worth of deals,” Sweeney said.

While private equity’s appetite for behemoth deals has fallen sharply, PE groups from around the country have a continued interest in small to mid-market companies. Because Wisconsin has many small to mid-market firms, particularly in fields such as manufacturing, which private equity has a strong interest in, PE groups are still strongly interested in the local marketplace, Zuzick said.

“I do feel that in the buyer market, the PE market is very active now,” Zuzick said. “There’s doom and gloom in the big arena, but there’s still a lot of good buyers out there and a lot of good companies to transition. Strategic companies and the PE groups are licking their chops now.”

“There is a feeding frenzy for high-quality businesses,” Miller said. “(Earlier this year) we had two of the three best quality outcomes from deals, where the sale price dramatically increased because of competition. If someone has a recession-resistant business that continues to grow this is an incredibly good time.”

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