The results of Citizens Bank’s 2019 M&A Outlook survey are in, and 600 middle market companies throughout the country confirm that it remains a seller’s market.
Ralph Della Ratta, head of M&A Advisory at Citizens Capital Markets, credits high multiples, abundant liquidity and financing packages offered by banks and lenders for today’s active M&A market where “sellers are the kings”.
Buyer interest and valuations are high, and the economy is strong — almost 80% of companies surveyed cite a strong economy as an important factor in their M&A. However respondents also indicated that they’re not sure how long this climate will last. Almost half expect an economic slowdown in the next two years.
Della Ratta is surprised by this finding. “It’s hard to see a slowdown coming when you’re in the midst of an environment that has no slowdown that you can see. We’re as busy today as we’ve ever been. We have a higher backlog of business than we’ve ever had by a substantial margin, and it’s not just our firm. It’s our competitors’.”
Della Ratta says that in spite of an expanding economy, a supportive regulatory environment, low interest rates and beneficial corporate tax policies, there’s a sense of urgency mixed with caution. Companies that initially planned to wait a few years to buy or sell are being counselled by their lawyers and accountants to strike now while the iron is hot, even though there are no clear indicators of a cool-down.
“All the data points we’re looking at tell us that M&A activity is accelerating. It’s hard to think that when you’re in a car and you’re accelerating, that you’re going to come to a dead stop soon,” says Della Ratta.
Despite some apprehension, confidence remains high overall. Fifty nine percent of companies surveyed anticipate another strong year, and 80% of buyers are confident they will close a deal in 2019. A desire to supplement organic growth is at the heart of many buyers’ M&A initiatives. 63% of companies surveyed expect to source growth externally through M&A, while 71% of potential buyers are actively engaged in an acquisition or are open to pursuing one. This appetite for growth is driving a 43% increase in M&A solicitations, with prospective sellers reporting an average of two to five solicitations per month.
Hungry for a Deal
Bolt-on and transformative acquisitions hold equal appeal for companies looking to expand their reach in the market, and despite recent concerns over tariffs and trade friction, international deals are more popular than ever, with more than half of sellers willing to consider an international buyer. And the appeal of an international buyer is not limited to the prospect of gaining access to global markets. Sellers are often drawn to international deals because they are likely to fetch a higher price and may allow them to keep their executives in place after the sale.
There are plenty of interested buyers in the U.S, too, and competition between buyers is heavy, so sellers can take their pick. 62% of sellers surveyed are engaged in an M&A transaction or are open to one. More than half are interested in selling part of their core business or a non-core asset or division, while 47% would consider selling their entire business. The 2019 survey shows a marked increase in interest (up from 48% in 2018) from potential sellers inspired by premium valuations, frequent M&A solicitations and an appetite for expansion that exceeds the limitations of organic growth.
Della Ratta explains, “High multiples create more desire on the part of sellers to have their companies marketed by investment bankers or others.”
Most sellers and buyers are turning to advisors to expedite the M&A process and ensure a smooth transition. Advisors offer assistance to sellers looking to get the best price and a finance structure that works for them, while buyers receive assurance that due diligence practices are followed and opportunities are accurately assessed. Two-thirds of buyers believe it eases the M&A process when the seller works with an advisor.
Sellers may have the overall advantage, but tech companies in particular, along with business–to-business services and healthcare-related companies, are the real superstars of the seller’s market, with multiples rising and heavy and active bidding. Buyers may feel pressured to act as their competitors make key acquisitions.
“A lot of that is driven by state of the art and breakthrough technologies, and people are willing to pay a lot for that,” says Della Ratta.
While buyers and sellers are both eager to do business, there is some cause for caution. Della Ratta advised one client eager to sell right away to hold off for a year and wait for the launch of a new product line and the addition of a big new client, both of which would significantly increase the value of the company and the interest of prospective buyers. He predicts that the company can earn about 30% more money by taking a year to prepare for the sale.
The Importance of Market Research
“Don’t put your company on the market without talking to experts. Don’t enter the buy side market if you don’t know where the price tags are,” Della Ratta says. “You have to be conscious as a buyer of who your competitors might be and how they might act and react because it’s expensive and time-consuming to bid on a property in a competitive auction.”
What else should players in the M&A arena be aware of? The typical sales process can take up to a year, but respondents have predicted changes in the market occuring in as little as two. This shift may be precipitated by rising interest rates (45%), an economic slowdown (41%), the 2020 elections (36%), a stock market dip (33%) or unforeseen circumstances (28%).
Sellers may move quickly to capitalize on premium valuations while some buyers may wait until valuations drop off. This suggests that even a weaker economic climate would sustain M&A activity.
Nevertheless, 2019 will likely be a big year for both buyers and sellers — and for investment bankers. Della Ratta, who has been in the business for 42 years, declares, “We’ll look back and say these were the golden years.”