As we have examined, 2011 was a turn-around year for overall M&A activity. The question now becomes: What will 2012 look like in terms of deal closings? Despite all the economic and political uncertainty, 2011 turned out to be quite a solid year for deal closings in the U.S. Will the same hold true for 2012 or will the volatility impact buying?
No one can predict the future with any certainty. This is especially the case in today’s volatile economic/political environment. However, a number of analysts are expecting 2012 to be another year of deal growth. You can include Ernst & Young in this category.
According to recent reports, Ernst & Young believes that “strong fundamentals, led by an increased focus on growth, should generate an uptick in deal flow in 2012.” These “strong fundamentals” that Ernst & Young is referring to are:
- Robust cash positions
- Strengthening balance sheets
- Improved credit markets
- Mounting pressure for growth in a low organic growth environment
Of these four fundamentals, perhaps the key driving force will be the last point. We have discussed the significant amount of cash on the balance sheets of corporate players in past articles. In normal recoveries, this would be enough to propel M&A activity. However, corporate leaders are still concerned about economic volatility and are retaining cash as a hedge against uncertainty. But given our economy’s anemic growth, the new reality is that the fastest way to grow a company is via acquisitions.
The Corporate Dilemma
CFOs and CEOs know this as well. You can’t keep sitting on billions in cash earning 1% or worse for much longer. If you answer to a board of directors and shareholders, you will eventually have to make a choice between the following options:
- Sit on it. Earn what you can and play it safe. This does not please shareholders. There are also potential tax ramifications to this strategy that may negatively impact the corporation.
- Return it. Give it back to shareholders in the form of dividends. In the long run, this is not what shareholders want either (in most cases).
- Buy back shares. Again, for some investors this will be positive; however, over the longer term, shareholders will look for more aggressive use of this cash than simply the company investing in itself.
- Invest it in equipment and expand. This would be a great option coming out of most recessions when the economy typically heats up and grows 5-6% for several quarters. Given projected 1-2% GDP growth for the foreseeable future, using much of your capital to pursue this option is not optimal (certainly this will occur though as strategics will look for every avenue for growth).
- Invest in R&D. This can be very risky and take decades to produce a return. Although critical for some industries, for many companies it isn’t the best use of these funds, especially when you can acquire proven R&D via acquisitions.
- Acquire synergistic fits. Certainly there are risks associated with this option, too. However, given our expected lackluster economic growth, it actually is the fastest and most efficient way for a strategic player to gain market share, expand geographically, gain access to new equipment and technologies and ultimately, improve earnings.
So Generational Equity concurs with Ernst & Young: 2012 should be another year of solid M&A activity. Given the amount of cash on hand, it is reasonable to assume this will be the case.
What You Need to Consider
The key question every business owner must answer is this: Given that acquirers are active, don’t I owe it to myself, my family, and the legacy I have built in my company to at least find out if buyers may find my business attractive? Don’t you owe a fiduciary duty to those who depend on you and your company for their livelihoods to fully research this option and determine if now is the best time for you to exit your company?
Of course the entire decision to sell a business is complicated, and gaining as much knowledge before hand is vital. Generational Equity holds free informational workshops around the country that are designed to provide business owners with a foundation of knowledge about exit planning, finding optimal buyers, and determining when the time is right for you to sell. If you would like to attend one, please click here and one of our M&A professionals will contact you to determine if you are eligible to attend.
Bottom line: If you own a business, invest some time to learn as much as you can about when and how to exit it for the most profit. As we have discussed, the next few years will present you with a rare opportunity to sell your company before the tidal wave of businesses owned by baby boomer retirees hit the market. It will be far better to sell at the beginning of this period than at the end when supply will outstrip demand.
Carl Doerksen is the Director of Corporate Development at Generational Equity.
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