Mergers and acquisitions steadily increased through 2010, as the industry rebounded from a lagging 18-month period during the Great Recession.
Most investment bankers and mergers and acquisitions professionals expect 2011 to continue the recovery trend, but no one is expecting a quick return to the record high volumes experienced between 2003 and 2007.
According to a December survey by the Wisconsin chapter of the Association for Corporate Growth (ACG), 84 percent of Wisconsin-based dealmakers expect an increase in M&A volume over the next six months. Of that 84 percent, 16 percent believe there will be a significant increase, while 66 percent believe there will be a moderate increase.
“While the environment is improving, there is still a fragility that exists,” said Ron Miller, ACG Wisconsin chapter president and managing director at Cleary Gull Inc. “This is not a frothy market and we’re not going to get back to where we were at the peak. But we’re getting back to a healthy M&A and financing market.”
About 88 percent of the respondents to the ACG survey believe that the economy will continue to improve over the next 24 months. Economic recovery in 2010 and into the next two years has driven, and will continue to drive, M&A activity, Miller said.
“Entrepreneurs have had better business performance and are looking to take advantage of the stronger market,” he said. “And on the financing side, banks and other lenders have a strong appetite to book new assets. Banks usually have about 70 percent of their lines drawn. Now they have about 40 percent outstanding. They need to book loans to meet their budgets for 2011. My phone is ringing off the hook with private equity funds, mezzanine (lenders) and senior lenders who are looking for transactions.”
Private equity firms are beginning the sell process on some of their portfolio companies. Private equity owners typically hold companies for five to seven years, and some firms were forced to hold on to portfolio companies for several extra years because of the economic downturn when those companies might not have performed well and demand may have been weak.
“We have a lot of private equity business now,” Miller said. “They’ve waited a long time. We have a really strong backlog of (private equity) assignments.”
Doug Mitman, managing director of Grace Matthews Inc., said his firm’s backlog on private equity-owned companies for sale has increased similarly.
“On the private equity side, they had a desert for the last two and a half years,” he said. “A lot of the private equity guys are starting the process of selling (portfolio) companies. We now see some of them saying they need a couple of exits here.”
As more companies in the middle market owned by entrepreneurs, families and private equity firms come onto the market, they should be met by increasing numbers of strategic and financial buyers, whose appetite for companies continues to increase.
The majority of the clients that Pewaukee-based Mertz Associates Inc. represents now are on the sell side, said Linda Mertz, managing director of the firm. The company closed five transactions last year, and it represented sellers in four of them, she said.
“I see buyers being more proactive (today),” Mertz said. “Companies are looking at buying for four reasons – to fill excess capacity, rebalance the business focus, capture market share, and for diversification.”
Most of the buyers that Mertz has seen her clients’ companies sold to have brought enough cash to the table to close the deal, or their balance sheet is strong enough that borrowing from a bank is no problem. While banks today are more willing to help finance mergers and acquisitions, the financial market is nothing like it was three or more years ago.
“The problem with the banks is that they don’t know what their reserves should be,” Mertz said. “They don’t know what will happen with Fed requirements for reserves. (Banks) are getting a little more comfortable with lending, but they’re still cautious.”
Chris Zuzich, managing director with Milwaukee-based Pentvia Partners LLC, agreed. While larger banks are more willing to help fund M&A transactions, smaller banks are having more difficulty.
“The smaller the bank, the more challenging the opportunity,” he said.
Even larger banks have changed the terms of loans they will make to help fund transactions, Zuzick said.
“If a bank is interested, (a buyer) will need to bring in an equity partner or cash to get them to look at the deal,” he said. “But I don’t think it will get more difficult. I think it will get gradually better. Given the changes in the local community (with M&I being acquired) it opens the door for a lot of different banks. We’re seeing some large banks get into the marketplace and people are going to be very aggressive with M&I customers.”
The last up-cycle in the M&A industry lasted from the early 2000s until mid 2008 and while industry insiders in the Milwaukee area don’t expect a repeat of that cycle, they do anticipate at least two years of good opportunity in the marketplace.
“The fundamentals are lining up much better than they have for the last two and a half years,” said Joe Froelich, managing director with Corporate Financial Advisors LLC. “Business fundamentals are solid, interest rates are low, bank financing is returning to the market. Political and regulatory predictability is back. People are more optimistic about business, and there are pent-up deals.”
Zuzick agreed.
“We’ve seen an increase in activity since June or July of last year and we think there will be growth in 2011,” he said. “It won’t be real aggressive activity, but I think there will be stable activity for the next 12 to 18 months.”
Miller predicts that the cycle will last for two to three years, largely because of the large amounts of money available for M&A on the national scale.
“Everyone is a buyer. Corporations have $1 trillion in cash on their balance sheets. Private equity funds have over $400 billion in un-invested capital,” he said. “There are record amounts of cash sitting on the sidelines looking for a home. It’s returned to being a seller’s market.”
