WEST MICHIGAN — A couple of deals this month typify the kind of mergers and acquisitions activity occurring these days.
In Hart, Heartland Propane sold to Grand Rapids-based Crystal Flash Energy, which through the deal grows its customer base in communities northwest of Grand Rapids. The deal is the fourth acquisition Crystal Flash has made in a year.
In the insurance industry, two Grand Rapids agencies came together this month, as Lighthouse Group and Mills Benefit Group merged. That deal strengthens Lighthouse Group’s market presence and expands its employee benefits services at a time when the agency “is focused on strategic partnerships and growth opportunities that continue to bring value to our clients,” President Tom Helmstetter said.
Both transactions represent strategic acquisitions that are generally designed to grow the buyer, increase market presence or product offerings, or expand into a new market or territory.
While M&A professionals say they are seeing a decided increase in financial buyers seeking to boost their top and bottom lines through an acquisition, the predominant driver of deals remains strategic reasons.
Strategic buyers “still are ruling the day as far as who’s going to be involved in M&A transactions,” said Brian Page, a member of the business services practice at law firm Dykema’s Grand Rapids office. That “could be a function of those who see opportunity in uncertainty and the economy providing opportunity for strategic buyers,” Page said.
And for business owners across the economy who want to sell their companies right now, the conditions are ripe for securing a good price.
“Sellers have definitely had their price expectations adjusted a bit to what they see as reasonable,” said Phillip D. Torrence, managing partner at the Kalamazoo office of Honigman.
Owners of businesses that made it through the recession in relatively good shape and now have a fairly clean balance sheet are now getting a premium when they decide to sell, Torrence said. Buyers, in turn, are willing to pay more for a good company that meets their acquisition criteria and has a proven management team, he said.
“Prices have come up over the course of the past 18 months. There’s definitely been a meeting in the middle. I call it a push right now,” Torrence said. “For good companies, you can get a very robust price.
“For buyers, you pay a good price but you’ll get a well-run company that made it through the most difficult times this nation has seen in 70 or 80 years. The guys that got through, they have options and there are some very good deals to have.”
Attorney Peter Roth, who runs the M&A practice at Varnum is Grand Rapids, said he’s seeing sellers getting five to eight times earnings before interest, taxes, depreciation and amortization (EBITDA).
Improved economic conditions have driven more buyers into the M&A market, which in turn has more business owners willing to listen, M&A professionals say.
In many cases, deals are resulting from pent-up demand. Business owners of the Baby Boomer generation who wanted to sell and retire were unable to get their asking prices for their businesses during the recession. They’re now back in the market and able to get the right price, or at least enough to strike a deal.
In a separate Dykema survey of executives at automakers and their suppliers, 43 percent of respondents said their companies declined to proceed with an acquisition in the past year, largely because their valuation wasn’t right.
Valuations have not returned to pre-recession levels and “are not great, but they’re up enough that a lot of people are looking at it and saying, ‘I’m three or four years older than when I wanted to sell. I can cash out enough,’” Roth said. “They’re getting enough. Back two or three years ago, they weren’t. They’re getting enough now that they’re going, ‘I can take the chips off of the table and live my life.’”
In other instances, business owners who managed through the recession are now finding they want out and are putting the business up for sale after realizing they have much of their personal net wealth tied up in the business.
“They now have the ability to take some of the risk out of what the future may hold for them personally,” Honigman’s Torrence said.
At the same time, the increase in buyer interest has motivated some owners to pull back and continue to wait it out. Their thinking is that it’s a sellers’ market and if they wait longer to sell, maybe they can get even more for the business, especially as a slowly improving economy drives sales upward and profits improve, said M&A attorney John Sommerdyke, a senior principal at the Grand Rapids office of Miller Canfield.
“As business improves, some sellers are thinking, ‘Well, maybe I should hold on to it next year and sell then if I can get more,’” Sommerdyke said.
Sommerdyke and others say M&A activity picked up toward the end of 2012 as business owners who wanted to sell and had a buyer sought to complete the deal by year’s end to avoid paying a higher federal capital gains tax, which went from 15 percent to 20 percent on Jan. 1.
Deal volume in Michigan in 2012 grew 14 percent over 2011 to 361 deals, according to a recent report from P&M Corporate Finance. Across the Great Lakes region, M&A activity has grown faster than the rest of the nation, the report said. Activity came in a cross-section of economic sectors that include manufacturing – especially automotive, real estate, information technology, and health care and medical devices.
Honigman completed 37 deals for clients alone in December across the entire firm, Torrence said.
At Miller Canfield, Sommerdyke calls 2012 a “very busy year,” especially in the fourth quarter as the increase in the capital gains tax approached.
“That did motivate a lot of people to go to market to test the waters to see if they could get something done,” he said.
Varnum’s Roth said he did 20 percent more deals in 2012 than in 2011, and the firm was up about 10 percent. He anticipates about the same level of M&A activity in 2013.
“The pipeline is good. I think it’s going to be pretty steady,” Roth said. “The activity should be pretty good the next couple of quarters.”
Their sentiments echoed what Jonathan Siebers, an attorney in the Grand Rapids office of Smith Haughey Rice & Roegge, told MiBiz for a report in November.
“I’m seeing people across a wide range of industries (who are) figuring it’s a good time,” said Siebers, whose deals tend to be at the low end of the middle market, with transaction values from about $1 million up to $15 million.
Varnum’s Roth doubts that business owners who wanted to get a transaction done before Dec. 31 to avoid the higher tax burden in 2013 will kill a deal if they didn’t close prior to the new year. Even with the higher capital gains tax that kicked in Jan. 1, business owners who were ready to sell will follow through.
“You’re psychologically ready to sell,” Roth said. “I don’t think we’ll see a single one of these people kill the deal because they didn’t get it done. They’ll still do the deal.”
Another driver of deals is that many corporations and private equity funds that sat on capital during the recession are now out buying.
After the recession, and with the economy doing better, many companies are again looking to grow through acquisitions.
“For a lot of companies, it (the recession) was about survival for a few years,” Roth said. “Now people are thinking, ‘All right, I want to think about growth and what I want to look like three to five years from now.’”
There’s also more capital available to finance a deal. Banks are doing more lending, corporations have a lot of cash on hand and private equity that remained idle during the recession is now getting deployed for companies that showed resilience during the economic downturn and rebounded well the last two years.
At the end of the third quarter of 2012, corporations in the U.S. had an estimated $1.20 trillion in cash, according to a recent report of data gathered by P&M Corporate Finance.
“Strategic corporates have a record amount of cash on their books – with pressure from shareholders to put cash to work or distribute to investors, analysts expect continued incentive to pursue M&A activity in 2013,” the P&M report states.
Private equity funds formed prior to the recession that stood pat for a couple of years of the economic turmoil now face pressure from limited partners to deploy their capital as the window to make investments approaches, Sommerdyke said.
“They have to use it or lose it now,” he said.
But that doesn’t mean financial buyers such as private equity funds that are returning to the market are going to make investments just to make investments.
“Equity managers feel pressure to deploy their capital, but they don’t feel pressure to do stupid things,” said Phil Gilbert, managing director of P&M Corporate Finance.