GDP is ticking up, consumer confidence has more than doubled in the last twelve months and industrial production is increasing. Does that mean the time is right to consider an M&A transaction either as a buyer or a seller?
Smart Business spoke with Bill Watkins, co-head of new business development for Harris Williams & Co., a member of The PNC Financial Services Group, about the current climate for mergers and acquisitions and how a company can position itself and prepare to maximize today’s opportunities.
What is happening in the M&A market?
M&A volume has begun to pick up substantially. While an improving economic climate is at the forefront, there is also greater availability of capital and more robust demand for high-quality companies. The debt financing markets, as evidenced by record volumes of high-yield financing, have begun to rebound. Additionally, it is estimated that private equity firms have more than $600 billion in uninvested capital to put to work, which represents more than $1 trillion of buying power.
Strategic buyers have spent the past 12 to 18 months focused internally to rationalize and improve operations and balance sheets, and many are now aggressively exploring M&A as a growth vehicle. Overall, considerable pent-up demand exists following a year with very low deal volume. In this environment, companies looking to sell or acquire assets have a lot more options than they did a year ago.
How can companies benefit from today’s environment?
Businesses that performed well through the economic cycle are able to achieve relatively strong valuations. Owners of privately held companies might consider selling their business to transition ownership as they plan for succession or to realize their investment prior to potential capital gains tax rate increases.
Today’s market offers a unique opportunity for companies to buy assets that will enhance their business. Sellers of quality businesses that waited on the sidelines during the downturn are re-emerging, and there are a large number of assets for sale that experienced some level of distress as the economy turned.
What should buyers look for?
Buyers should seek out quality companies and industries that were less affected by the downturn than their peers. When pursuing an acquisition strategy, buyers should look for:
- Market leadership
- Sustainable competitive advantages
- Financial stability
- Excellent growth potential
- Potential business synergies
Carefully evaluate the potential net gain. Will the target strengthen your company by diversifying markets and customers or adding management depth? Or will the distractions of integration pose a significant risk to your business?
It is also important to remember that a bad balance sheet does not necessarily mean a business is bad; distressed M&A in the current market can provide an opportunity for future value creation. As you consider an acquisition, communicate early and often with your financing partners about acquisition debt capacity. Although the markets are improving, this is not the time to take credit availability for granted.