Largely driven by the continuing economic recovery, mergers and acquisitions activity has moved at a hectic pace since last year, and many local M&A experts think there could be even more activity in the second half of this year and beyond. The market for buying and selling companies is strong, both nationally and in the Midwest, said John Beagle, a managing director at Grace Matthews, a Milwaukee-based firm that assists in M&A activities.
"I think it’s still blazing," he said. "We’re waiting to see the early signs of a (slowdown), but we’re not seeing them."
Those early signs would include companies posting slower earnings than in previous quarters and banks reporting more defaults. Neither of those trends are happening, Beagle said.
The highly aggressive private equity market, with large sums of money to invest, and a banking market that is "still frothy" are two other signs that M&A activity will continue at high levels for at least the next six months, Beagle said.
"There is a huge pent-up demand for deals on both sides," he said. "If you are a top quartile private company, due to the demand right now, you will get a disparate amount of attention."
The Milwaukee and Wisconsin M&A markets are mirroring national trends, according to Nancy Schott, director of the Milwaukee division of Cornerstone Business Services, a Green Bay-based M&A firm.
"We’re not experiencing things that are vastly different than things on the national level," she said. "It’s not as robust as the late 1990s, but certainly robust is appropriate to describe what we’re experiencing.
There are high levels of activity across the industries, from printing to business-to-business services to the construction trades. Locally, if any of that is still lagging, it’s manufacturing. They’re still focused on sustaining rather than growth."
Between closed deals and signed letters of intent, Schott said her company already has surpassed the volume of business it did in all of 2004, with another five months of work to go in the year.
"We’re excited about the second half of the year," she said. "I think it’s going to be a very prosperous and opportunistic second half of the year."
The next 10 years, when many members of the baby boom generation retire, will create even more M&A activity, Schott said. Half of the business owners who fall within the baby boomer generation are planning to sell their businesses in the next decade, she said.
"That could lead to some market saturation," she said. "And I think some sellers are trying to capitalize on that market now. People want to get ahead of that."
Private equity investors have large amounts of cash designated for purchasing companies, and much of that money has not yet been used, Schott and Beagle said. Because they have a limited amount of time to invest that money, many private equity investors are now looking for purchases, which is driving competition for available companies, Schott said.
At the same time, banks and other lenders are both offering low interest rates and are willing to make more aggressive investments, adding further fuel to M&A activity.
"The multiples are improving, and banks are being more liberal when it comes to lending," Schott said. "They’re taking more risks, because they have improved confidence in the economy and people in general are more willing to take more risks. And we’re seeing a lot of buyers who want to be in control of their own destinies, who want to take things into their own hands.
"Buying a company has become a good alternative to the stock market and the risks of the scandals that have been out there," she said. "Things are moving full-speed ahead."
The Milwaukee office for Cornerstone Business Services will be expanding in the next year to meet the increased demand for M&A services. The office has five people working in it now, and Schott said she is hoping to have another three transaction advisors added by the end of 2005.
"We may step that up with the market increasing," Schott said. "And in the next three to five to seven years, it makes me even more optimistic."
Similarly, Grace Matthews added a vice president and an analyst to its office to meet the rising demand for M&A services.
Anderson/Roethle Inc., a Milwaukee M&A advising firm, also had an increased number of opportunities to provide services in the last six months, said president and principal Stanley Johnson. That trend should continue through the end of the year, he said. The firm has increased its staff by two people in the last year to meet the demand.
One of the biggest reasons for the increased activity, Johnson and others in the M&A field say, is that companies are experiencing a degree of economic recovery now after several slow years, making now a good time to sell.
"In the past two or three years, many have thought to hold off a bit because a lot of companies were not doing well," Johnson said. "Combining that with the lower multiples being paid (by banks and other lenders), they didn’t like the way the math worked out."
Because multiples have improved, interest rates have remained low and companies have reported better financial positions in recent years, the M&A market has improved, Johnson said.
"When you have a few quarters of improvement behind you, it becomes a better story to take to market," he said. "People start to come off the sidelines. There are more prospects on my list that I have talked to at least on an early stage, than I’ve had in four years. And the deals that we’re working on are getting done. Those are positive indicators for me."
While his phone keeps ringing with buyers and sellers looking to make deals, Johnson has noticed that private equity firms have not been calling him as much as they had been during slower times. That slowdown indicates that those firms don’t have to work as much to find deals.
"That’s telling me that they’re not shaking the tree as hard," Johnson said.
Steven Bernard, director of M&A market analysis for Robert W. Baird & Co. Inc.’s Chicago office, is a bit less optimistic about M&A activity in the second half of 2005. While many private equity firms say they are very busy now, the national number of deals is down about 8 percent this year, he said.
"That’s surprising, and at the beginning of the year we were pretty optimistic," Bernard said. "We had a strong 2004, and nothing changed that much to account for (the lower numbers)."
Although the number of deals has declined, the dollar amounts of those deals have been higher than those from 2004, Bernard said. That has Bernard looking at the second half of the year with a degree of optimism.
"I hate saying it, but I’m cautiously optimistic," he said. "We could have a small pickup, depending on how we measure it. It may not be gangbusters, but we’re relatively optimistic that it should pick up a little bit. It may not be frothy, but it should be on par or stronger than the first half. There’s nothing in the near term to cause us to believe we will see a weaker market than we have here."
July 8, 2005, Small Business Times, Milwaukee, WI
