Merger and acquisition activity, which got off to a torrid start this year, will slow down a bit in the third and fourth quarters, according to Douglas Mitman, managing director at Grace Matthews Inc., a Milwaukee-based consulting firm that specializes in M&As, leveraged buy-outs and recapitalizations.
"We’ve already seen a bit of a dip," he said. "I think it’s going to be a little bit slower, that it will be down a bit, but always assuming there are now major world events. But it’s very robust right now, and it can’t stay where it is. There is a lot of room to come down and still be very good."
Mitman said several factors are driving up costs for buying existing companies, including: financial buyers who have secured financing within a specific time frame, many of which are expiring now; and new markets of buyers, such as private equity firms.
Newly emerging hedge fund groups, which do not have the same limitations as private equity funds, are among the forces driving up costs, he said.
"They can put more equity into the deal," Mitman said. "And they can ultimately pay more for businesses. And a lot of them play on the debt side and can compete with high yield funds and banks."
More than half of Grace Matthews’ business is in providing advice for companies selling their businesses.
"I think there will be pressure if interest rates continue to rise," he said. "But I’m not sure that they will rise that much more. But the trend line is up now. And if it goes up too much, that can affect things. But I think that values will be robust until the end of the year. Then we’ll have to revisit them. But I feel good saying they will hold for at least the next six months."
Mitman also is keeping an eye on two other trends: competition from China and the rising commodity prices.
"If you bring a company to market right now and you are susceptible to (Chinese competition), a lot of guys, as buyers, won’t look at it," he said.
Prices for raw materials such as steel, concrete and petroleum products are rising because of increased demand in developing nations such as China and India, Mitman said.
"There’s a lot of upward pressure, and that can have a tremendous impact on businesses," he said.
Mitman and John Beagle, the other managing director of the firm, founded Grace Matthews in 1999. The company’s office, located on the seventh floor of the Phoenix Building at 219 N. Milwaukee St., in Milwaukee’s Historic Third Ward, originally had five employees. It now has 12.
Mitman and Beagle bought out former managing director, Mike D’Amelio, about four weeks ago. D’Amelio worked out of Grace Matthews’ Boston office, which has since closed.
"As more and more of our business came through the Milwaukee office, Mike was spending more and more of his time on principal investments and less on Grace Matthews work," Beagle said. "It was a friendly buy-out."
When it opened for business in 1999 before the dot.com bust, Grace Matthews began by helping technology companies raise capital. By early 2001, the firm switched to working with manufacturing companies, where he and Beagle have the most experience.
"These are usually a publicly traded company or family-run business," Mitman said. "We set up kind of an auction or quasi-auction process."
Most of Grace Matthews’ clients are from outside of Wisconsin, but Mitman said it has helped some local companies, such as Menomonee Falls-based Raabe Corp. and Milwaukee-based Open First, with mergers and acquisitions.
The remaining 40 percent of Grace Matthews’ work is divided between helping multi-national corporations that are looking to acquire a company in the United States and assisting in leveraged buyouts by managers within a company.
"A lot of them are foreign, and they don’t have their feet on the ground here," Mitman said.
"We’re good at the financial engineering and gaining access to the financial market," he said. "We’ve had some real success there."
Mitman declined to disclose Grace Matthews’ revenues, but he said the company has averaged 30 to 40 percent annual growth over the last three years.
One of the areas Mitman is targeting for growth is work in the health care industry. The company had opportunities to work with that market in previous years, but it did not have in-house expertise for the industry, he said.
However, Tammie Miller joined Grace Matthews as a vice president about two years ago, bringing a strong background in the health care industry, Mitman said.
Grace Matthews Inc.
Address: 219 N. Milwaukee St., Milwaukee
Web site: www.gracematthews.com
Annual revenue growth: Average 30 to 40 percent
Employees: 12
May 27, 2005, Small Business Times, Milwaukee, WI
