January 26, 2016
At the close of each year I like to take the temperature of the Merger & Acquisition market to help set our goals for the new year. Here is my assessment, although at the time of this writing we find ourselves in the midst of a major market “correction” or perhaps a full bear market since the turn of the year.
2015 was a record-setting year for M&A Deal Value
According to Pitchbook Data, Inc, last year saw a whopping $1.95 trillion in combined North American and European M&A deal value – 21% over prior year 2014. This growth in total $ deal value was accompanied by higher valuation metrics due to the desire or the need for companies to grow their revenue base through good quality strategic acquisitions. (I use the word “need” because many companies today are struggling to grow their sales due to the threat of quickly changing consumer patterns, newer competitive technologies or “disruptor” entries into their market.)
Why is this relevant to us? Because those same favorable metrics are driving the acquisition of small privately held companies, where Transact Capital maintains its focus – those having revenues below $100 million. With the continued availability of historically cheap bank financing combined with the desire for companies to grow through making strategic acquisitions, we see the deal environment continuing at a strong pace absent an economic recession or sustained stock market fall lasting throughout the year.
Even if cheap bank financing tightens due to economic growth as dictated by the Fed, there should be continued funding for acquisitions from many sources. Private equity in particular has ample dry powder, and strategic acquirers have built up significant cash reserves as a result of strong results in the last three years. Investment bankers also help out by creatively structuring transactions to meet the circumstances presented.
The broad equity and stock markets are the biggest unknown and thus a major threat to this forecast. At the time of this writing we do not know if we are in a “major correction” or a strong bear market. Regardless, analysts are racing to lower expectations, and there should be at least a significant concern among large strategic acquirers due to this uncertainty and increased risks.
For a silver lining, we may get some offset from private equity firms who are flush with cash. I think Peter Lehrman, CEO of Axial, says it well: “I think private equity firms will be substantially more active this year  than last year, unless markets continue to go off a cliff… a lot of them have a lot of capital that they have raised last year or in 2014, and if the broad equity markets are down 15% to 20% this year, it will allow them to become active again, because they will be able to price and win deals at valuations they are more comfortable with.”
So it’s wait and see with the equities market, but I believe we still have a solid window to get deals done, at least in the near term. And if you are thinking of an exit from your business within the next 2-3 years, it is important to realize that higher sale prices come when investment cash is plentiful and when your company is growing. If exiting is not in your plans for the near term, keep focus on your growth strategy, and at the same time shore up defenses against the changing landscape.
Below are general “rules of thumb” EBITDA pricing multiples for small privately held companies, by industry, reported in the 3rd quarter of last year, according to MarketPulse, a highly respected survey taken quarterly by Pepperdine University:
|TEV/EBITDA – BY INDUSTRY CATEGORY|
|Media & Telecom||7.3x|
These are strongly impacted by deal size, as shown below:
|TEV/EBITDA – QUARTERLY SPLITS|
|TEV||Q1 2015||Q2 2015||Q3 2015|
|$10 – $25M||6.1x||5.6x||6.3x|
|$25 – $50M||8.0x||6.5x||5.9x|
|$50 – $100M||7.9x||6.9x||8.7x|
|$100 – $250M||8.2x||9.0x||10.5x|
|*TEV – Total Enterprise Value, the total purchase price, plus debt, of a business|
|*EBITDA – Earnings before interest, taxes, depreciation, and amortization|
Keep in mind that they are very general rules of thumb and must be adjusted for any discounts or premiums due to the specific attributes of the company. Transact Capital would be glad to discuss these with you if you call us.
Transact Capital Partners