Economic slowdown could spell opportunity for buyers

As the U.S. economy shows signs of slowing down, buyers may soon be in a better place to get deals done.

“Companies are always looking for growth, and they are starting to see organic growth slow down,” says David Dunstan, president and managing director at Citizens Capital Markets. “In that kind of environment, where do you look for growth? Acquisitions. With cash on their balance sheet and still very low interest rates, being a buyer is something larger middle-market corporations are very attracted to.”

Nearly three out of four potential buyers are either actively engaged in an acquisition or open to pursuing one this year, according to the Middle Market M&A Outlook released by Citizens Commercial Banking. The survey of 600 U.S. companies found that 59 percent of respondents expect another strong year of M&A activity in 2019, and only 25 percent expect dealmaking activity to slow before 2021.

Chasing growth opportunities

As the market slows, buyers will be eager to swing into action.

“You’ll start to see a slowdown in overall sell-side activity as you see the economy begin to slow,” Dunstan says. “You can imagine, as a business owner, it’s not nearly as attractive to put your material together and have conversations with buyers when you’re seeing a decline in your orders and your backlog. We’re seeing demand on the buy side by companies that want to be more aggressive but also want to be smart buyers. We think that trend is going to continue and accelerate even more once we start to see a downturn, because valuations will come down. For those companies that have a strong balance sheet, it will be an even better time to aggressively pursue growth.”

One factor driving this trend is the record level of cash sitting on S&P 500 companies’ balance sheets, Dunstan says.

“They have money to deploy, and they see organic growth slowing,” he says. “The obvious motivation for them is to look for acquisitions to accelerate growth.”

While the survey found that 45 percent of respondents believe rising interest rates will ultimately cause a downward shift in dealmaking activity, the Federal Reserve announced in March that it expects to keep U.S. interest rates between 2.25 and 2.5 percent for the rest of this year.

“Debt is still relatively inexpensive and very accessible, and both banks and nonregulated banks remain quite interested in putting money to work,” Dunstan says.

That’s not to say that the era of the seller’s market is over. 

“There’s a lot of data to suggest it’s a wonderful M&A market, particularly for a seller,” Dunstan says. “Valuations are quite high, and there is a lot of money chasing deals. Business owners are aware of and understand the environment. As a result, a significant percentage of them are considering a sale.”

Market adapts, moves forward

Andrew Petryk has completed transactions throughout the Americas and Europe for family-owned, publicly traded and private equity-controlled businesses at Brown Gibbons Lang & Co. He shares Dunstan’s optimism about the state of dealmaking in 2019.

“Private equity, strategic buyers and lenders all remain aggressive,” Petryk says. “The first quarter of 2019 started out with a lot of momentum. It doesn’t surprise us given the amount of capital that is out there and strength of the overall economy.”

Last year, there was significant talk about trade wars as the U.S. and China went back and forth implementing new tariffs. While there was an impact in the M&A space, the economy has dealt with the uncertainty and forged ahead.

“The shock to the system related to the unknown around the tariffs took place in the second and third quarters of 2018,” Petryk says. “The market has adjusted in and around that. The impact is not that significant to most of the businesses we’re working with.”

The public stock markets tend to have a much bigger reaction to such developments than other markets.

“The private transaction market tends to take that stuff in stride and be less emotional and reactionary,” Petryk says. “They are connected. The overall performance of the stock market does impact the way people view what’s happening. If the stock market is performing well, business owners are that much more optimistic about their own business. But the private transactions market is just not as tied to the news as the public markets.”

Ohio reflects nationwide trend

Overall, dealmaking activity in Ohio seems to reflect what’s happening across the U.S., Dunstan says.

“We’re seeing more and more privately held companies reach out and look for advice with regard to the M&A environment,” he says. “We’re often amazed at the quality of companies in Cleveland and Columbus between $10 million and $50 million of EBITDA that a lot of us are unaware of. Many of us don’t even realize these companies exist.”

This includes software, service, health care and industrial companies that are growing, attractive and contemplating acquisitions. 

“They are also contemplating bringing on private equity and strategic partners in sale transactions,” Dunstan says. “It’s a strong environment. Our region demonstrates the same attributes that the national market is seeing with M&A volume and interest in doing transactions.”