“I will take what is behind door #2, Monty. (from the original Let’s Make a Deal Show with Monty Hall)
Author’s note – I am really dating myself with this quote.
A colleague and I recently had the opportunity to present a session on what we were seeing as trends in transactions in our marketplace. We chose to use our own universe of deals – situations where we were engaged to provide some due diligence services. We combined this with some general market information as well as some other client experience. Our conclusions were pretty obvious – it is a great time to consider a transaction (purchase or sale.)
So, let me share just some notes and observations from our session:
- There is a lot of “dry powder” out there – estimates are financial sponsors (like Private Equity Groups) are sitting on $1trillion; there is another $1trillion sitting on Corporate balance sheets (excluding financial institutions.) To put this in perspective, these two amounts added together are equivalent to the 6th largest GDP in the world (just behind Brazil.)
- Financing is available – rates are historically low and terms are very reasonable. Consider the leverage on this “dry powder” and you have the makings of very favorable financing climate.
- Patience hell; let’s kill something – corporations large and small are growing impatient with the “new normal.” The reason for this year’s 1 or 2% growth can be the result of which days the Holidays fall on versus last year. In that environment, it is difficult to consider yourself managing for success. It is not hard to surmise you need more sustainable growth to survive.
- Synergy is “in” – the grueling economy over the last few years has trained owners and their management teams how to get along with less. Adding some new “bolt on” or “tuck in” acquisition does not seem as challenging as it once was.
- “Strategics” have the edge – of the companies who engaged us, 80% were strategic buyers. That synergy combined with a deeper knowledge of the market returned this group to the more historical relationship with strategics doing more deals than financial buyers.
- Financial sponsors may be headed to “time out” soon – the pricing is getting a bit “frothy” and making the economics work on the “buy side” to satisfy their limited investors is proving to be a bit of a challenge. That being said, it appears there is still broad interest for good deals. Obviously, for those on the “sell side,” this is nice to see
- Why did deals work?
- Realistic price expectations
- Strategic fit
- Management teams
- Why did deals fail?
- Seller remorse
- Chasing revenue only – no conviction
- Unexpected surprises
So, given the above, it is a great time to consider a transaction. Just keep in mind that while the overall atmosphere for a deal may be more “enabling,” each deal has to stand on its own merits and deal frenzy should not replace sound analysis as a reason to buy or sell. Good luck!