Recently the question that has been raised is this: Just how long will the current “sellers market” continue? As you know, a number of forces are coalescing now to create one of the strongest M&A cycles in recent memory. As you can see below, since the end of the last recession, M&A activity has been quite strong:
In Part I of our Canadian private equity (PE) update we examined overall deal flow for the past several years, as well as the phenomenon of the popularity of add-ons for PE targets. As you’ll recall we found that deal volume is up dramatically in Canada since the end of the recession AND that more and more professional buyers are pursuing a strategy of bolt-ons to existing targets.
Today we look at additional Canadian PE info relating to key components of activity:
- Location of the buyers
- Size of the deals
From time to time we like to review M&A activity in Canada since quite a few of our readers and clients are located north of the border. As you can imagine the Canadian M&A market tends to mirror that of the U.S. However, during the current M&A cycle, because the Canadian economy and financial sectors were not nearly as impacted by their U.S. counterparts, the Canadian recovery started earlier and has been stronger. This is especially true of private equity acquisition activity. This is how PitchBook, a leading research organization focusing solely on private equity and VC activity, describes the situation in their Canadian PE Breakdown 1 Half of 2015:
For a long, long time private equity received far more than its fair share of negative publicity. We see this with nearly every M&A summit we host – Business owners predominately shun PE buyers because of the negative view that equity firms acquire businesses to either consolidate (cut jobs), reduce expenses (cut jobs) and/or break companies up and sell the pieces.
Certainly history is littered with the scenarios described above. However, since mega PE transactions get nearly all the press, it is clear that the view of these professional buyers is very skewed.
In fact, we have found over the years that private equity firms that specialize in acquiring middle-market (and even lower middle-market) companies have a different game plan in mind. Rather than buy and break, they buy and build. Instead of simply using financial engineering to reduce costs/overhead, they bring managerial skills, marketing and sales experience, and operational expertise to take a smaller company (when combined with an existing platform company) from sales and profits of X to X2.
Topics: private equity firms
As we have examined before, the M&A market is in the midst of one of the strongest sellers markets in quite some time. This trend was reinforced recently by an article on TheMiddleMarket.com, an online publication published by Source Media. Entitled “Dealmakers Race to Close Deals While Favorable Conditions Still Prevail,” it examined the factors driving buyer activity right now and looked at issues that might impact the length of the cycle. According to the publication:
Given the news that the U.S. economy actually contracted by 0.7% in the first quarter of this year, it is now widely assumed that the Federal Reserve’s plan to raise rates has not only been delayed but will also be at a slow “crawl” when they do start to increase interest rates. This is how the Washington Examiner described it recently:
With the economy shrinking in the first quarter and interrupting the Federal Reserve's plans for tightening monetary policy, analysts now expect the central bank will only "crawl" when it comes time to raising interest rates.
"The new buzzword at the Fed seems to be no longer 'liftoff,' but 'crawl,'" Ethan Harris, co-head of Global Economics Research at BofA Merrill Lynch Global Research, said.
It’s time to update you on the excessive amounts of cash and committed capital just waiting to be deployed by both corporate strategics and private equity firms. According to Business Insider:
Much has been made about the multi-trillion mountain of cash sitting on corporate balance sheets. Credit Suisse's Andrew Garthwaite estimates $1.4 trillion sits with US corporates ... [and said,] “And, according to the research firm Preqin, ‘dry powder’ [with equity firms] stands at a record $1.2 trillion.”… Some experts believe that some of that cash will be deployed for, among other things, mergers and acquisitions (M&A).
According to Mergers & Acquisitions’ Mid-Market Pulse (MMP), dealmakers continue to forecast that M&A in the manufacturing sector will expand. This can be seen in the following graphic:
Loyal readers of this blog will recall that we have spent quite a bit of time throughout the years educating business owners on how private equity firms operate. We have discovered several common traits for PE firms that specialize in investing in or acquiring smaller companies.
Given how critical it is for privately held business owners to know what their company is worth, I thought I would revisit the topic. If nothing else, if you are doing any estate planning at all, knowing what your company is worth is vital. Most business owners that we meet with have somewhere between 80-90% of their personal net worth tied up in one highly illiquid asset: the company they own.
Not only does this make estate planning tough, it also exposes the financial legacy you want to leave behind to your offspring to tremendous risk. But even if you are not planning to exit any time soon, knowing the value of your company today will allow you to take steps over the years to enhance and grow its valuation.