An already strong M&A market could get even more competitive in 2019, driven by a good U.S. economy and plenty of available capital.
That’s the conclusion from law firm Dykema Gossett PLLC’s annual M&A outlook survey that found a record number of respondents offering an optimistic view of the market nationally and expectations for continued movement toward smaller deals.
Optimism soared in this year’s survey as nearly two-thirds of respondents expect the market to strengthen in 2019, and just 15 percent predict a weaker market. That compares with 39 percent a year ago who anticipated a better market in 2018.
The findings align with the 64 percent of respondents who feel positive about the U.S. economy through the next year.
“Our respondents feel very bullish with respect to both the M&A market and the economy,” said Tom Vaughn, co-leader of Dykema’s M&A practice at the law firm’s Detroit office. “What we have seen in the past, particularly last year as well, is that those two indicators tend to move together. When people have a positive outlook on the economy, they tend to have a positive outlook on the M&A market as well.
“People have confidence in the economy, at least through ’19. The good economic times are driving a lot of the current activity.”
Beyond 2019, there are “obvious signals” about the economy and in Michigan “that make people somewhat cautious,” including the length of the current U.S. economic expansion, Vaughn said. He doubts that a survey question asking about the economy over the next 24 months would get the same level of optimism.
Senior business executives and M&A professionals in Michigan who answered the survey were a little “less bullish” about the economy, said Brian Page, a business and corporate finance attorney for Dykema in Grand Rapids. Although 62 percent of Michigan respondents felt positive about the current U.S. economy, just 38 percent expected growth or improvements in the next year, versus 57 percent nationally.
U.S. economic conditions ranked second among the main drivers of M&A activity, behind the availability of capital and above favorable interest rates, financial markets, and U.S. tax law changes at the end of 2017.
Survey respondents were most optimistic about transactions involving private companies. According to the survey, 82 percent of people said they were “bullish” on private company deals, the highest percentage since 2014, with the activity driven by owners whose companies are growing earnings and want to take advantage of the existing strong market.
A year ago, 44 percent of survey respondents ranked age as the top reason driving sellers of private businesses. Age declined to 20 percent this year as the primary reason, although it still ranks highly alongside current earnings and existing M&A market conditions as the top motivators for sellers.
“Those three factors this year all kind of converge as the reason why private companies are selling,” Vaughn said. “It ties back to people are selling because they think it’s a good time to sell in terms of valuations and based upon where their company is at.
“They’re making a real business decision and saying, ‘You know what, we think this is a great time to sell. Our business is doing great, the economy is good, the M&A market is good, and this is the right time. We shouldn’t hold off on it anymore.’”
In Michigan, 32 percent of respondents cited “concerns about the window closing” as the primary reason private owners are deciding to sell, Page said.
Accelerating plans
Matt Miller, managing director at BlueWater Partners LLC in Grand Rapids, said he’s seeing sellers come forward who have decided to sell now, rather than wait and take the chance that the market cools.
“The window’s open right now, their business has grown, they know the market is strong, and they recognize these expansions don’t last forever,” he said. “They don’t want to wait, and they certainly don’t want to wait through the next downturn.”
Miller cites economic data such as rising interest rates, predictions for easing GDP growth, and a Business Leaders for Michigan report that shows waning economic confidence among the state’s top business executives as signals that the M&A market may have hit a peak.
However, year to date, business at BlueWater Partners has been “going great guns,” Miller said.
Likewise, other M&A professionals in the market recently told MiBiz that their activity remained strong through the third quarter.
Some like Randy Rua of Rua & Associates LLC in Hudsonville have urged clients looking to exit their businesses in the coming years to consider accelerating their plans.
“It’s definitely a seller’s market. We’re trying to enjoy that as long as we can and encourage people not to wait,” Rua said. “I’m hoping to get one more year out of it. We’re talking to a lot of people who want to exit, and I don’t want them to miss the window.”
Chasing deals
As 2019 looms, the Dykema outlook for the third straight year projects more smaller deals of less than $100 million. Only about one-quarter of respondents expect growth in deals of more than $100 million and 41 percent predict diminished deal volume above that level.
The finding reflects the current competitive environment in M&A that’s led more buyers to move into the lower end of the market for good deals. To that end, survey respondents rank competition as the second-highest barrier to M&A activity, behind availability of quality targets and above valuations, which have been inflated in the strong market.
Private equity firms facing a deadline to deploy their capital increasingly have started looking for possible targets at the lower end of the market than where they historically have sought to invest.
“People are seeing opportunities in the smaller deals that they’re not seeing necessarily in the larger deals,” Vaughn said. “Looking for those great companies that can get multiple returns for investors is getting harder and harder. As a result, people are going downstream to find smaller deals that offer them better opportunities because that market hasn’t been as shopped and it’s a market that doesn’t get as shopped.”
As outlooks project an easing in U.S. economic growth during 2019, the question for many M&A professionals remains how long the strong M&A market will last.
Vaughn believes that when the next economic downturn occurs, it will come and go quickly and have minimal impact on the M&A market.
“There is still a lot of capital out there chasing deals,” he said. “Even with what I would call a slight downturn in the economy, I don’t think it’s going to have a major impact on the M&A market.”
