Merger and acquisition activity was strong in 2015, and experts predict it will remain so – and maybe even accelerate – in 2016.
“There’s still buyers out there looking for deals,” said Vicki Fox, managing director at Eisen Fox & Co. LLC in Milwaukee. “Even though interest rates have ticked up a little bit, money is still basically free,” making it easy to finance deals.
According to business for sale marketplace site BizBuySell, 17 of its listings were sold in the Milwaukee-Waukesha-West Allis market in 2015 at a median sale price of $625,500. The businesses sold had a median revenue of $600,000 and cash flow of $174,991. Buyers paid an average of 0.77 times revenue and 2.91 times cash flow.
While the number of Milwaukee area businesses sold on the site is down 29.2 percent from 2014, the median sale price is up by 292.8 percent, according to a BizBuySell analysis. Six of the transactions were in the service sector, while five were in non-restaurant retail and four were in manufacturing.
“I think 2015, for us, it was a record year as far as number of deals closed,” said Ann Hanna, managing director at Schenck M&A Solutions in Milwaukee.
And 2016 is likely to remain robust in volume, Hanna said. Financial performance was a little soft to close 2015, but that hasn’t seemed to impact deal flow or the number of sellers coming to market.
“Most people are seeing this as just temporary softness and that it’s not an indicator of an imminent recession,” Hanna said.
In fact, some expect deal activity to accelerate in 2016.
“2015 was a boom year,” said Steve Barth, partner and co-chair of the Transactional & Securities Practice at Foley & Lardner in Milwaukee. “It was as good as they get in our business. Deal volume has just really never been higher that I can remember in my 32 years.”
Barth said deal flow has been getting heavier, so 2016 is likely to surpass 2015 in deal volume. Valuations are good, buyers are plenty, it’s relatively easy to get debt financing and companies have strong balance sheets, he said. Meanwhile, the easiest way to generate growth in the current economic environment is through acquisition.
“If they’re going to get into high single or even double-digit growth, most of them (strategic buyers) are doing it through acquisition,” Barth said. “The more manufacturing companies are contracting, the more they are looking to grow through acquisition. It’s kind of their only way out of the box.”
The fact that it has been a seller’s market for several years and softness is creeping into certain industries has some sellers interested in pulling the trigger, Fox said. Manufacturers, in particular, have seen their backlogs begin to dwindle and would like to get to market now just in case orders start dropping off.
“They don’t want to miss this window. They might have missed the window five or six years ago, and they don’t want to miss it again,” Fox said. “You never know what will happen in a year. The market’s still there to exit at a good valuation.”
For owners who don’t want to go through another business cycle before selling, there’s probably only another year or two to get out, Hanna said.
“If you just look at business cycles, everyone’s sitting here and saying ‘Ok, our last business cycle was 2008-2009, and what is it, 2016 now? It’s a matter of time,’” she said. “I think there’s a handful of people saying, ‘Gosh, I don’t want to go through another business cycle.’”
Eisen Fox has seven sell-side deals working to get a letter of intent signed this month alone. The firm expects to have a busier year than in 2015, based on that pace. It completed three deals last year.
Overall valuations haven’t changed significantly, but the structure of deals has shifted since the Great Recession, from 50 percent cash to 80 percent cash, Fox said.
“Private equity groups are trying to sell everything they can right now because the market’s so good,” Fox said.
On the flip side, private equity firms are also swamped with the number of deals they’re looking at on the buy-side, Hanna said.
“I do have private equity (buyers) who are bowing out of deals just because of capacity issues,” she said. “They’re starting to see more and more deals, because more sellers are coming to market.”
“Private equity firms are really flush with cash and they need to start generating returns and investing that cash on behalf of their limited partners so they are chasing deals and chasing them hard,” Barth said.
Buyers of late are more frequently private investors and fundless sponsors, who then raise a fund to make the purchase, Hanna said. The ability to raise these kinds of funds could result from individuals looking to invest outside the tumultuous stock market.
“We are seeing a lot of rollups,” she said. “People go into one industry and buy up companies all within an industry to make one big company. There’s strategic (buyers) doing rollups and it just, I think, speaks to the general activity out there.”
On the other hand, Barth has seen more share buybacks and spinoffs as companies focus in on growth segments.
“It seems like the economy goes through … conglomeration phases and deconglomeration phases and I think we’re going through a deconglomeration phase,” he said.
Because of the large number of interested parties for each deal, buyers are paying a premium right now, Hanna said.
“We are into the go-go crazy frothy market days where if you’re not in double digit (multiples), you’re not playing,” Barth said. “It’s fun for sellers, not too fun for buyers.”
Technology, health care, telecommunication and business services are all seeing heavy M&A activity, Hanna said. Alternative energy, as well as medical device and technology deals, are especially hot right now, Barth said. Both said manufacturing deal flow hasn’t slowed down despite any softness the industry is experiencing.
