Valuations soar as M&A competition heats up

Competition is fierce and conditions remain ideal, so valuations are on the upswing in the Milwaukee area, according to local experts.

Mergers and acquisitions activity is steady, and they expect it to remain so at least through the end of the year.

Howard Lanser, managing director, mergers & acquisitions and debt advisory at Robert W. Baird & Co. Inc. in Milwaukee, said he expected more robust activity than he has seen in the first quarter of 2014, but predicts the year will still end up on an even keel with 2013.

“We are not seeing as many small deals as we did last year. The activity is moving to larger deals,” he said.

Considering the encouraging conditions, including a large amount of uninvested capital on the sidelines and a favorable debt market, Lanser said he’s surprised M&A activity has been a bit lackluster in the early part of 2014.

“There are trillions of dollars on corporations’ balance sheets, there’s very few avenues for organic growth in this type of tepid economy that we’re in, so M&A is an attractive way to accelerate growth,” he said.

The M&A business has become more cyclical in recent years, weighted toward completing deals before the end of the year, Lanser said.
“Anecdotally, pitch activity has accelerated significantly,” he said. “Our backlog at Baird is very strong and we would assume that our competitors are as well.”

Jeff Beischel, founding partner and managing director at private equity firm Wing Capital Group in Milwaukee, has also noticed more confidence among buyers and increasing deal flow.

Multiples are up significantly from a year ago, Beischel said, though they vary among types, qualities and sizes of companies involved.

“Performance of companies has improved and stabilized and their earnings are up, despite the fact that it’s tougher and tougher to grow the top line,” he said. “It’s a sellers’ market right now. For business owners looking to sell, this is a very good time to consider it.”

Sellers are being driven to the marketplace and competition for the good companies is frothy, said Greg Myers, senior managing director at private equity firm Mason Wells in Milwaukee.

“For good companies, for really nice choice A companies, it’s kind of a feeding frenzy,” Myers said. “Even B-, C+ (companies), there’s still a lot of players.”

Myers has seen multiples that would usually be in the five or six times EBITDA range driven higher, in the range of seven or eight times, by aggressive buyers who can easily fund the deals with debt.

“The stock markets have been very strong for well over a year, so you’ve got stock valuations moving up,” he said. “And then when you lay on top of that the availability and the cost of debt … debt is cheap.”

Brian Dunsirn, chairman and chief executive officer of private equity firm Dunsirn Partners LLC in Greenville, has been among the competing buyers at auctions. In an average situation, there will be a synergistic buyer, 12 private equity firms and a couple of semi-retired executives all bidding on the same company.

“(Deal flow is) down this year versus the last couple of years,” Dunsirn said. “What is for sale, the prices and multiples are driven up quite high because there’s so much competition to acquire those businesses.”

The higher valuations can make it difficult to get value out of an acquisition, so Dunsirn Partners has remained cautious in its search for a seller.

“If you’re paying eight, nine, 10 multiples of cash flow, any hiccup that comes down the road, it can be a real challenge,” he said.

Dave Strand, president and CEO of industrial oven manufacturer Wisconsin Oven Corp. in East Troy, has a seller’s perspective on the current M&A market. He sold the company in 2012 so there would be capital available to invest $3.5 million in a 30,000-square-foot addition to the manufacturing space that is currently under construction.

It was important to Strand to select the right buyers for Wisconsin Oven, to make sure the culture wasn’t upset, there wasn’t turnover and the owner remained hands off while he continued to run the business. He spent about eight months on due diligence and completing the deal.

His advice to business owners considering a sale: “You have to sell on your schedule, nobody else’s schedule, and you’ll know when you’re ready. In today’s market, there’s always people pounding your door down, trying to get you to sell, but you’ll know when you’re ready.”

Lanser will serve as the keynote speaker and Dunsirn, Myers, Beischel and Strand will be panelists at the 2014 M&A Forum, which BizTimes Media will host from 7:30 to 11:30 a.m. on Friday, May 2, at the Milwaukee Marriott Downtown in Milwaukee. The event, themed “The Market is Active— Strategize Accordingly,” will offer insight from the panel and professional advisors Corey Vanderpoel of Schenck M&A Solutions, Eric Lenzen of Whyte Hirschboeck Dudek S.C. and Peter Ruud.

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Molly Dill, former BizTimes Milwaukee managing editor.

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