The last 18 months has seen a rebirth in M&A. For the first time since the 2008 financial crisis, deal activity has reached pre-recession levels. This has been fueled by low interest rates, high equity prices and capital availability.
CDI Global's Managing director, Jeff Schmidt, has gone on the record stating that while it's hard to make universal observations when business conditions vary drastically by region, it is noteworthy that in the middle market there is currently a low inventory of quality deals and that there are far more active buyers than sellers, so the expectations of sellers regarding deal pricing are relatively high. He explains that one of the major reasons for this seller's market is the relatively large amount of investment capital sitting on the side-lines in private equity funds, and the leverage available to strategic buyers as well as financial sponsors. Jeff predicts that this imbalance between strong buy-side demand and the supply of quality acquisition opportunities will persist in 2016 due to the natural human tendency to time the market. The reasoning that if sellers wait long enough to sell, the valuations will be even higher than present. However, for the savvy buyer with insight and planning, they will be able to figure out the right targets and getting a deal into play with a company that offers legitimate potential; for profitable growth and strengthened competitiveness.
The fundamental drivers of global transactions are pointing to a continued strong upturn in M&A and IPOs over the next three years, with many North American and European companies having accumulated large cash balances available for acquiring new business.
Consolidation in fragmented industries
Jeff Schmidt comments that "most private equity firms are searching for platforms and some will sponsor consolidations in fragmented industries and this we'll see this trend continuing in 2016." He adds:
strategic companies (as is the case with private equity firms) should periodically assess the value of every distinct business in their portfolio and if the value of a given business is below what an external buyer is willing to pay for it then a sale may be the right course of action... that is, you should at least consider divesting. The funds repatriated from the sale could be reinvested in businesses or assets that could create more wealth for the shareholders down the road.
Jeff cautions that this idea "sounds straightforward in theory, but is very hard to practice – for many good and bad reasons alike".
PE search for proprietary deals and bilateral transactions
Public auctions can be expensive and disruptive to the continuity of a seller's business. They are also not very appealing to most buyers. Jeff comments that,
[w]e hear over and over again from both strategic buyers and private equity investors that they want to find proprietary deals, bi-lateral negotiations, in order to avoid the high costs and risks of participating in an open auction process. Acquisitions search is done today in a crowded market place. Breaking through the crowd to find the right deals is the key challenge most companies face when trying to find proprietary deals.
Silicon Valley at the centre of M&A market
The most active sectors over the next 5 years are forecast to be Healthcare, Telecommunications and Financials, and it is anticipated that Consumer Goods & Services, Technology and Pharmaceuticals will also be boosted, primarily due to cyclical trends. More and more players in the M&A market are set to acquire companies in 2016, with Ernst and Young's Global Capital Confidence Barometer noting that 56% of global companies intend to acquire businesses over the course of the next 12 months. As the wider M&A market heats up, so too will activity in the tech space.
The main message is that for corporates, the window of opportunity for strategic cross-border M&A is now. The operational drivers, cyclical trends such as equity prices and economic conditions such as GDP growth are ripe for deals until 2017. Imaginably most notably, positive business sentiment is back – CEOs have the confidence to pursue their strategies and the equity markets are rewarding those who deliver.
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