What to expect from the M&A market in 2013

Albert D. Melchiorre, President, MelCap Partners, LLC

Albert D. Melchiorre, President, MelCap Partners, LLC

Considering the uncertainty in the stock market, 2012 turned out to be a good year for mergers and acquisitions (M&A), and the outlook is even better for 2013, says Albert D. Melchoirre, president of MelCap Partners, LLC.

“Last year was pretty tumultuous, with the overwhelming European debt crisis, a slowdown in certain emerging markets, uncertainty about the presidential election and its potential impact from a capital gains tax perspective, and the fiscal cliff debate,” Melchoirre says. “But there were several factors that would indicate reason to be optimistic about the M&A market in 2013.”

Smart Business spoke with Melchoirre about those factors and his expectations for the M&A marketplace in 2013.

How was 2012 from an M&A perspective?

The number of domestic M&A transactions was down by 4.6 percent from 2011. However, the average deal size increased 13 percent — from $138 million to $156 million. From a private equity standpoint, fundraising increased 31 percent compared to 2011. That bodes well for future M&A.

It’s interesting to note that deal volume was up 56 percent in December compared to November.

What was the reason for the end of the year activity?

The primary driver was the capital gains tax increase in 2013. There was concern that if President Barack Obama was re-elected taxes were going to go up significantly. The M&A process typically takes six to nine months, so that started before the election outcome was known. But there was pressure to try to get something done before the end of the year.

Another situation driving transaction activity was private equity dividend recaps.  Many PEGS were going to the bank and taking out large dividends so the money would be taxed at the lower rates in 2012. They didn’t have enough time after the election to sell the business, so they paid out large dividends instead.

Because of the influx of closing activity in the fourth quarter of 2012, my sense is that 2013 will start out slowly. But I’m cautiously optimistic. When we look back at 2013, the numbers may be flat or down slightly because there isn’t enough time to make up for that lull.

Why are you ‘cautiously optimistic’ about the M&A market in 2013?

Some of the positive signs are the large amounts of cash reserves on corporate America’s balance sheets. The S&P 500 alone has over $1 trillion in cash, which is very strong. Combine that with favorable credit terms in the banking market and improved consumer confidence, and the elements are there for a solid year.

Another positive sign is more clarity with respect to the tax situation. Now business owners won’t be dealing with making decisions based on unknown, pending tax law changes. There’s something to be said for certainty. Uncertainty creates a tendency to be hesitant to make a move. When people know the rules of the game they can make decisions accordingly.

Do you expect corporate cash reserves to be utilized this year?

Absolutely. When you have corporate buyers sitting on these large cash reserves they have to deploy that capital in order to grow their business — there’s only so much equipment you can buy. When companies are sitting on trillions of dollars, one of the ways to accelerate that growth is through acquisitions. Cash is king and you can take advantage of opportunities in the market to grow and expand your business. And that cash will have to be deployed — the public markets will not let them sit on those reserves.

Last year, 75 percent of our sell-side deals were sold to strategic buyers who were sitting on a large amount of cash. Corporate buyers are acquiring competitors or complementary businesses through vertical or horizontal integration. With deals involving a private equity buyer, if they don’t have a portfolio company it would strictly be a financial play.

While I’m cautiously optimistic we’ll see more of the same activity this year, it looks like 2014 could be even better.

Albert D. Melchoirre is president of MelCap Partners, LLC. Reach him at (330) 239-1990 or [email protected]

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