An annual survey by Dykema suggests 2013 will bring a slight uptick in mergers and acquisitions in the U.S. compared to the past few years, although plenty of uncertainty remains that will keep a damper on deal volume.
Responses indicate “there are glimmers that may point to an eventual return to more robust deal-making markets” in 2013, states a report on Dykema’s eighth annual M&A survey. A few more respondents than a year earlier predict a stronger U.S. economy and M&A market in 2013.
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Those views represent a contrast to respondents who remain worried about the U.S. economy. One-third still hold a negative view of the 2013 economy.
“It seems that we have naysayers still, and we’ve got other groups who are seeing better things ahead,” said Tom Vaughn, a member of the M&A practice at Dykema’s Detroit office.
Dykema surveyed M&A professionals and senior executives from Nov. 7-20. Nearly three-quarters of the respondents were from Michigan and Illinois. Twenty-eight percent of the respondents expect a strong M&A market in 2013 and 14 percent see it as weak. The remaining respondents were neutral.
The results are similar to a year earlier, when 26 percent expected a strong market and 16 percent saw a weak market going into 2012. Two years earlier, 38 percent of respondents saw 2011 as generating strong M&A activity and 10 percent saw a weak market ahead.
Vaughn and Brian Page, a member of the business services practice at Dykema’s Grand Rapids office, recently talked with MiBiz about the results of the annual survey.
Bottom line, what’s the survey data telling you this year?
Brian Page: The message this year was a dichotomy and a little bit bipolar. We had a great number of respondents that had reservations about (2013), and we had a third of the respondents that had a negative outlook for the U.S. economy and (nearly) a fifth who anticipated a weaker M&A market. So there’s lots of uncertainty out there.
What we found interesting in the results, and some potential optimism out there, is there was also another group of respondents that were more positive this year than they were a year ago. We had more in the survey this year predicting a strengthening of the U.S. economy and a stronger U.S. M&A market for 2013 than we did last year. So there seemed to be another group of respondents that were more positive than the group generally was a year ago, which is a little bit of the dichotomy.
Then throw into the mix though, that despite all that, last year 60 percent of respondents said they expect to be an acquirer in an acquisition in the next 12 months and this year we’re just under 50 percent.
It could be a function of those that see opportunity and the uncertainty in the economy providing opportunity for strategic buyers and just a smaller, more concentrated group perhaps of potential acquirers that see strategic acquisitions as potential opportunities.
Is deal structure changing?
Tom Vaughn: What our survey would say, and what would be my experience, is structures are staying the same as they have over other last couple of years, which has been a heavy-duty emphasis on earnings and seller financing and all those things that are kind of associated with a weaker M&A market. The other one is working capital adjustments and making sure that at the end of the day the balance you are buying is in fact what you get when you look behind the books.
So there’s a lot more focus on due diligence and quality of earnings. The biggest reason people see deals not going forward is lack of quality earnings. They get behind the numbers and the reality doesn’t support the numbers they’re seeing from an earnings standpoint.
Brian Page: Economic uncertainties are still driving how people are looking at their deals and there’s just no room for a mistake in terms of pricing and how much you pay and when you pay.
What’s the primary motivation of the sellers these days?
Tom Vaughn: I would say it’s primarily twofold. One, multiples for the right deals are up very significantly, even though deal volume is not. If you are the right deal, you can sell your company for a very, very good price and take the money off the table.
I also happen to think that there is pent-up demand and continues to be. There are a lot of baby boomers who own companies and who haven’t been able to liquidate those companies for the last number of years, and that has lots of people out there looking for the opportunity to get out at what they think is a fair valuation.
We heard a lot during late 2012 about business owners wanting to complete deals by the end of the year to avoid the higher capital gains tax. Do you expect a spillover from that into 2013?
Tom Vaughn: There are a lot of people out there who are really willing sellers and if they were motivated enough to finally call (in December), I can’t believe that they’re going to go away (in 2013) just because of tax changes.
What are the hot sectors for M&A right now?
Brian Page: I think there’s going to be continued activity in the auto arena. Auto has been pretty good the last couple of years, last year particularly. There’s a lot of lack of capacity out there and opportunities. So I think we’re just going to continue to see, especially in the middle-market level in the auto sector, some M&A activity and continued activity as people just try to continue to grow their business and get more capacity, or selling out because they can’t keep up with capacity and they’re selling to somebody bigger.
Who does the market dynamics favor right now — the buyer or seller?
Tom Vaughn: If you are the right company, if you are the right target, the market conditions right now favor you, no question about it. There is lots of money chasing still too few really good deals.
Is the M&A market getting back to a normal situation post-recession or are we defining a “new normal,” so to speak?
Tom Vaughn: If this is the new normal, I don’t think that’s a good thing because I don’t think anyone thinks the M&A market is strong today. I don’t know that we’re going to see the hottest days of just before the recession anywhere in the near term. Over time, will we see significant improvement in the M&A market? Yeah, I have long-term confidence that it’s going to come back. It just has to. There’s too much money out there, and there’s too many companies that need to get sold that haven’t been sold. I estimate a slow, steady increase, and it’s going to take a year or two to come back and probably be in tune to what’s going to happen to the economy.