M&A activity remained strong in the first quarter, driven by a combination of factors including federal tax reform.
The massive federal tax bill that Congress enacted in December drove some sellers who may have otherwise wanted to push through a transaction by year’s end to delay closing until this year.
Uncertainty over the contents of tax reform and how it would affect sellers mitigated the traditional year-end push to close deals and contributed to a “very busy” first quarter, which is typically the slowest period of the year, said Tom Vaughn, a partner at Dykema’s Detroit office and co-leader of the law firm’s M&A practice group.
“People were not as keen to get those deals closed by year end and (instead) let them drift into the first part of the year,” Vaughn said. “So bottom line, we actually had a real bang-up first quarter.”
A strong economy and readily available capital and credit remain as key drivers of the M&A market, according Vaughn and Brian Page, a Grand Rapids-based member of Dykema’s real estate practice group.
Page expects financing for M&A transactions to remain readily available through the year.
“There doesn’t seem to be any end to the availability of funding,” Page said. “The amount of money that’s available continues to drive the activity. The money from all manner of sources does not appear to be drying up in any meaningful way.”
Even with rising interest rates, loan terms remain flexible for financing deals, Page said. Any post-tax reform repatriation this year of cash held overseas could further add to corporate M&A activity, he said.
Going into 2018, Dykema’s annual M&A survey and outlook predicted a stronger M&A market across the U.S., with more smaller deals occurring in the middle market and involving privately-owned companies. Of survey respondents, 38.5 percent said they expect a stronger market in the next 12 months, the highest percentage in four years. That compares with 33 percent of respondents a year ago who expected a stronger market in 2017.
In a recent briefing on first quarter activity, Grand Rapids-based investment banking and advisory firm Blue Water Partners LLC noted that M&A was “defying historical cycles” and “look(s) to be at full throttle.”
The firm’s activity through the first quarter was strong and consistent with 2017 and prior years, said Managing Director Matt Miller. He expects a “bull” M&A market to continue “until further notice,” at least until one or more of the primary market drivers experiences a fundamental change.
“As expected, we’re looking to 2018 to be another strong year and probably accelerate some, given the underlying economic and other variables that support transactions,” Miller said. “We’ve been singing the same song for a few years now, given the availability of capital and positive economic conditions and trends.”
Firms active in M&A continue to seek growth through the acquisition of companies that give them new geographic markets or add products and services, Miller said. New to the equation of late: Some companies are seeking out deals as a means to acquire talent in a tight labor market, he said.
In one transaction Blue Water Partners handled last year in the tool and die industry, the buyer was motivated to do the deal primarily to access the target company’s talent, Miller said.
An April U.S. economic outlook by Comerica Inc. predicted 2.7 percent full-year real GDP growth nationally, followed by 2.6 percent growth in 2019. Real GDP grew by 2.3 percent in 2017.
Comerica also expects two more interest rate increases this year.
However, experts in the market have expressed “underlying senses of caution” with a recognition that the U.S. economic expansion will eventually slow and come to an end, Vaughn said.
Nationally, Pitchbook.com reports the number of U.S. deals involving private equity investors grew 17 percent year-over-year to 619 transactions in the first quarter, although deal value declined 40 percent to $53.6 billion.
The higher deal flow and lower value indicate that private equity investors are shifting downmarket toward smaller transactions. PE firms also are doing more add-on acquisitions for existing platform companies, according to Pitchbook.
Among small businesses, the marketplace BizBuySell.com recorded a record number of transactions in the first quarter. The 2,678 transactions grew 13.1 percent from the first quarter of 2017, BizBuySell.com reported.
As long as the economy holds up, a strong M&A market should follow suit with what Page calls “very healthy” multiples.
“I don’t see any dark clouds on the horizon at this point, and everybody I talk to, all of the deal professionals, are the same way,” Vaughn said. “For the rest of ’18, just in terms of deal activity and in talking to people out there, I don’t see this market changing in a significant fashion.”