By: Duane P. Donner II, Managing Partner
M&A in the U.S. reached pre-recession levels last year and continue to build momentum on the back of a lot of dry powder (buyers with cash) and very favorable financing. Right now, it’s a seller’s market for most industries and sectors. Last year, Founders advised on seven transactions, and in the first quarter of 2015, Founders has already advised on four separate transactions, and in every case represented the seller. Timco Services sold to Frank’s International (NYSE:FI), a vertical SAAS client did a majority recapitalization with Providence Equity, Eagle Automation Limited did a majority recapitalization with Panhandle Oilfield Services, Inc., and a leading digital publisher of lifestyle content sold to 301 Digital Media.
There has been a continued proliferation of private equity funds, which currently have over $1 trillion in dry powder. In addition, we are seeing increased demand from corporate buyers who have a lot of cash on the balance sheet and are looking to fuel growth through M&A. The bottom line is that there is a lot of capital looking to be put to work through acquisitions, which for the most part is increasing deal volume and driving valuations higher. There are only a few exceptions, like oil and gas, where declining commodity prices have created uncertainty and buyers are being much more cautious. That said, when industries are contracting you will see consolidation through mergers, as well as value-conscious buyers entering the market.
Financing deals is also getting easier as interest rates remain low and commercial and industrial loan volumes have fully recovered from the last recession. According to PitchBook, the median debt percentage used to finance middle-market transactions last year was 71% versus around 55% in 2009-2011. At Founders, we are seeing this firsthand. This, of course, is one of the primary factors driving valuations higher.
Timing is very important when considering M&A, and there are both internal and external factors you need to investigate and understand, including shareholder needs, business lifecycle, industry dynamics, capital markets, tax implications, etc. Some of these factors you can control and some you can’t. Currently, the external factors are favorable so business owners considering an exit or recapitalization in the foreseeable future would be prudent to go ahead and take a look at their options and possibly accelerate their timeline. Selling at the right time can be the difference in not only receiving an out sized valuation, but in getting a deal done at all.
Because of the competitive M&A environment, many private business owners are experiencing increased unsolicited interest from both private equity and strategic buyers. This was the case with two of the transactions Founders closed in the first quarter. Receiving such calls can be exciting for owners, but we want to caution sellers against entertaining this unsolicited interest without having assistance from experienced and trusted M&A advisors. Many private company owners underestimate what’s involved in preparing a company for sale and achieving the best outcome. Most business owners will only sell their companies once, and it is oftentimes the largest single transaction of their lives. In that regard, it is very prudent to proactively build and prepare your company for M&A and seek professional help in the process. This takes time and intentionality, but really creates tremendous value if done properly. Reacting to a solicitation from suitors and pursuing one-off transactions generally does not end with the most favorable result. Running a proactive sell-side process will always yield the highest valuation and typically result in achieving a premium valuation.
Founders Investment Banking (Founders) is a merger, acquisition & strategic advisory firm serving middle-market companies. Founders’ focus is on oil and gas, industrials, software, internet, digital media and healthcare companies located nationwide, as well as companies based in the Southeast across a variety of industries. Founders’ skilled professionals, proven expertise and process-based solutions help companies access growth capital, make acquisitions, and/or prepare for and execute liquidity events to achieve specific financial goals. In order to assist Founders Investment Banking with securities related transactions certain Principals are registered investment banking agents of M&A Securities Group, Inc., member FINRA/SiPC. M&A Securities Group and Founders are not affiliated entities. For more information, visit www.foundersib.com.