Third quarter GDP growth, at 8.2 percent, marked the highest rate recorded in nearly 20 years. Corporate profits, which had remained a weak link in the nascent economic recovery, were up 30 percent in the third quarter. Publicly available data and anecdotal reports from our clients indicate that the outlook for 2004 is solid across the economy, including the rebounding manufacturing sector.
In the second half of 2003, the M&A market also demonstrated improved fundamentals, including a significant reduction in bankruptcy-related transactions. Private equity firms, which were a key driver of M&A activity throughout 2003, continued to deploy capital aggressively in the third quarter, completing the highest total number of deals since the fourth quarter of 1999.
Strategic acquirers also are returning, albeit cautiously, to the M&A market. Brown Gibbons Lang & Co.'s current transactions are generating markedly higher levels of interest from strategic acquirers, signaling that an improved economy and greater earnings visibility is creating corporate demand for strategic M&A opportunities.
This combination of liquidity in the private equity markets and heightened activity by strategic acquirers should lead to higher valuation multiples in 2004.
What to focus on in 2004
Brisk economic growth will provide a respite from the punishing conditions of the past three years. Management teams, including those in the middle market, should capitalize on improved operating performance and a period of robust M&A activity to execute critical strategic and financial initiatives that position their companies for future success.
In particular, management teams in both the manufacturing and services sectors must maintain focus on the relentless global competition that has become a permanent feature of the economy. In order to maintain viability in this environment, management teams must continue to expand productivity, shed noncore assets and develop businesses that are strategically defensible in the face of offshore competition.
Perhaps counterintuitively, these efforts may involve adding risk in the short term. For example, developing offshore production capabilities may require significant investment, but may be the only way to protect a business over the long term.
Banks and other capital providers are increasingly sensitive to the risks of foreign competition and supportive of investments that enhance competitiveness. In addition, many private equity firms with offshore expertise are seeking opportunities to provide capital and operational resources to businesses developing global strategies.
Positioning a business for the future also may involve altering its ownership structure. Owners of private companies should evaluate whether they have the ability and appetite to incur the risk required to grow their businesses and remain competitive. If not, market conditions in 2004 will present an excellent window for attaining liquidity.
Similarly, management teams of public companies or divisions of public companies need to evaluate whether public ownership provides financial and other resources that enhance the competitiveness of their business or whether the cost and reporting scrutiny associated with public status actually detracts from their ability to compete. If the latter is true, a going-private transaction or the buyout of a division by management may be the value maximizing alternative.
In 2004, owners and management teams should enjoy an unusual combination of improved operating performance, an easing credit environment and a highly active M&A market. This will provide an exceptional opportunity for owners and management teams to either capture the value of their businesses at an attractive valuation or to pursue strategic initiatives that will increase competitiveness and create value over the long term.
Craig A. Korte (firstname.lastname@example.org) is vice president of Brown Gibbons Lang & Co. He focuses primarily on mergers and acquisitions and corporate restructuring. Reach him at (312) 658-1600.