Merger and acquisition activity has increased significantly in the second quarter of 2018. We have never been busier supporting buyers and sellers in potential transactions. Here are seven key drivers we see fueling these transactions:
- Private equity is still sitting on a lot of cash that is available for acquisitions. In addition, companies have strengthened their balance sheets and are now looking to “leverage up” to get a better return on their shareholders’ capital.
- The talent war continues to heat up. With the unemployment rate at a near record low, management is often willing to acquire additional talent through acquisition to handle work from existing customers.
- Technology is a game changer. Many buyers are looking to either buy technology or use their existing technology to create value from acquisitions.
- Debt is still relatively cheap. Even though we see EBITDA multiples increasing, there is still sufficient positive cash flow from acquisitions to compensate investors (including existing owners) for taking on additional risk. At a five to seven percent interest rate, there is usually significant annual cash flow generated when buying a company above historical EBITDA multiples – especially if there are buyer synergies.
- Fixed rate investments are still very low. As a result, investors/stockholders do not require a high rate of return from investing in other companies to exceed what they would get from investing in fixed rate investments. Also, many investors do not anticipate the historic surge the stock market has experienced since 2008 to last forever, even over the short-term. So, many investors and stockholders are concluding that better risk-rated returns will come from buying existing companies.
- Owners are ready to exit, but may not have a strong bench. Many private company owners lack a succession plan and a next generation of leaders who they are confident will be successful. As a result, these owners often feel compelled to sell.
- Public companies are getting in the game. Many public companies are making more money and their valuations (as a multiple of earnings) have been increasing. As a result, they can pay more to acquire companies and these acquisitions can still be accretive to their earnings.
If you’re considering either buying or selling a business, please do not hesitate to reach out to us so we can share what we are seeing in our marketplace as M&A advisory experts. We’d love to talk with you.
David E. Shaffer
is a director with Kreischer Miller and a specialist for the Center for Private Company Excellence. Contact him at Email.
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