M&A activity remains strong, as dealmakers watch the markets closely

Never easy to predict

Rocky Pontikes, managing director at Mesirow Financial, believes M&A remains rosy for Pittsburgh and the nation.

He says PE has approximately $1 trillion in investible equity capital, which is then factored up with the debt used to buy companies. That means $4 trillion or $5 trillion of purchasing power in PE firms alone.

Pontikes is based in Chicago, as are most of the firm’s investment bankers. However, he’s worked in Western Pennsylvania on sell-side M&A for the better part of a decade.

In the middle market, he’s noticed a drive toward strategic tuck-in acquisitions, especially since organic growth rates have been benign for larger strategic buyers.

Valuations have gone up in this bullish market over the past four or five years, and Pontikes doesn’t expect that to change in the foreseeable future. Even with recent stock market volatility, confidence remains high in boardrooms, where M&A decisions are ultimately made.

The middle market continues to build bigger companies by adding complementary products and services, human capital and technology. However, he says some buyers may be more sensitive to cyclical businesses.

“Investors are beginning to get concerned that we’re in the late innings of an economic cycle, but I think it’s very hard to predict when the music stops,” Pontikes says.

President and CEO Michael Matesic finds the M&A market hard to predict, as well.

His nonprofit accelerator, Idea Foundry, invests in early stage companies. Its portfolio typically has 10 to 15 startups that are ripe for transaction. In the first half of 2018, three of those companies were acquired, but there wasn’t a hint of M&A activity the rest of the year. He has no explanation for the difference.

Matesic advises entrepreneurs to follow the Pittsburgh way when building a company. That means solid products and revenue streams, so the startup is structured well and mature beyond its years.

“If you’re going to build your startup and mirror it after what you see happening in Silicon Valley and you’re doing that in Pittsburgh, you may be not on the right track,” Matesic says. “If you build your business the Pittsburgh way, it doesn’t mean you’re not attractive to Silicon Valley.”

The other big mistake he sees is a too-wide business model. Entrepreneurs build a piece of hardware, while also creating a marketplace and trying to educate their customer.

The talent factor

Buddy Hobart, founder and CEO of Solutions 21, doesn’t just predict a slowdown in the financial markets, he’s already observing one with talent acquisition.

The last time the U.S. was under a sustained 4 percent unemployment rate was 1969. In addition, with 78 million baby boomers and only 60 million Generation X, there’s an 18 million person gap that needs to be filled by millennials as baby boomers retire.

Talent is a differentiator, Hobart says. Sellers that have invested in leadership development can demand higher valuations, and buyers with talent to insert are at an advantage.

In 2018, he saw three companies purchased by smaller organizations, in order to attain their markets. The smaller businesses had people ready to plug into the combined organization.

With financial buyers, Hobart has noticed pullback from long-term leadership payouts.

“Private equity firms are finding that I didn’t get what I bargained for. Joe Smith was great at running his business. Joe Smith is a lousy employee working for the private equity firm,” he says.

Rather than keeping leadership around for the long term, it might be for less time or not at all.

“It’s one thing to play to win. It’s another thing to play not to lose,” Hobart says. “If you keep me around for three years, for me to get the payout on my business, I’m playing not to lose. If I plug you in to take over my business and you’re going to run this for the next 20 years, you’re playing to win.”