Professionals expect a vibrant M&A market and strong deal flow this year amid easing U.S. economic growth and rising interest rates.
Investors, advisers and bankers all describe strong M&A activity last year that they expect to continue on throughout 2019.
“It shows no signs that it’s going to slow down,” said Renee Tabben, market manager for Bank of America in Grand Rapids who describes 2018 as an “extremely busy year” for financing M&A deals.
Among active buyers in the market, Grand Rapids-based private equity firm Auxo Investment Partners remained “really busy” during 2018 in reviewing prospective deals, according to Managing Partner Jeff Helminski.
Likewise, he sees no indication of an impending slowdown in the market.
“We’ve got a bunch of people that we’re talking to that are saying, ‘Hey, I have a bunch of stuff coming to the market after the first of the year,’ so it seems like there’s still a lot of activity out there,” Helminski said.
At Chemical Bank, Regional President Krista Flynn estimates that 20 percent to 30 percent of commercial and industrial loans during 2018 were for mergers or acquisitions, which usually account for 10 percent to 20 percent of commercial loan volumes.
Outlooks generally project a strong M&A market for 2019. Flynn suspects that higher interest rates could potentially temper activity somewhat. The Federal Reserve Open Market Committee implemented four interest rate increases in 2018 and additional increases are expected during this year.
“As rates go up, that’s more expensive from a financing perspective,” Flynn said.
Concern about the effect of interest rate hikes on deal volumes showed up in Deloitte LLP’s recent 2019 M&A trends survey. Nearly four out of 10 of the 1,000 corporate and private equity executives surveyed in the fall by Deloitte said higher interest rates will slow their activity or reduce their ability to execute deals.
Forty-five percent of respondents said rising interest rates could actually serve “as a trigger to accelerate deal activity,” as they act on an acquisition before further increases.
Participants in a recent M&A executive roundtable discussion hosted by MiBiz downplayed the role of higher interest rates on dealmaking activity.
Wells Fargo Bank Regional Vice President Don VanDine noted that credit and capital for buyers remains plentiful and affordable. Deals hinge on whether they are a good fit for the buyer and seller, rather than the cost of financing, VanDine said.
“If you look at the universe of buyers out there, it’s never been more liquid,” he said. “There’s never been more dry powder chasing deals and there are new entrants all the time. Large family offices are really getting into the fray. Private equity firms are as strong, as liquid as they’ve ever been, and there are more non-PE entrants all the time.
MiBiz M&A Deals 2018 Roundup
Last year remained active for middle-market M&A transactions in West Michigan. Here’s a look back at deals MiBiz covered in 2018.
Deal coverage sponsored by Lambert.
“I think right now, the people that are coming in are very liquid and financing may not be the top of their concerns list. They’re looking for good fits, for strategic fits, and they’re looking to take big swings at it. A quarter percent or a half percent here and there on a baseline rate from the Fed isn’t going to move the needle much.”
VanDine and others at the MiBiz roundtable pointed out that even with the Fed’s four rate increases in 2018, interest rates remain historically low.
“If major strategic decisions you are making are based on where interest rates are right now, even if they would go up a little, there’s something wrong in that logic, because it’s a very fair cost of capital,” said John Pollock, managing director at LV2 Equity Partners LLC in Ada. “There’s a lot of room still to move and keep it a fair cost.”
Results of the Deloitte M&A trends survey for 2019 point to a “further acceleration” and “sustained, strong” deal activity. Nearly eight in 10 respondents said they expected an increase in the number of deals they expected to close in the next 12 months. That compares with 70 percent a year ago who expected an increase in 2018.
Private equity executives held a more optimistic view than their corporate counterparts with 87 percent expecting to close more deals in 2019. Seventy-six percent of corporate executives responding to the Deloitte survey expect higher deal flow.
Just 21 percent expected M&A deal flow to decline or flatten in 2019, compared to 30 percent a year ago.
“Corporations have increased cash, in part due to tax reform, and M&A remain the No. 1 intended use of those funds,” according to a report on Deloitte’s trends survey.
Global economic uncertainty ranked as the top barrier to M&A, followed by potential delays in business-related legislation, rising interest rates, and antitrust issues, according to Deloitte.
In the middle market nationally, M&A activity through September was down 12 percent to 8,933 transactions from a high of 10,145 deals in the same period of 2017, according to Thomson Reuters. The average purchase price multiples dipped slightly to 7.1 times earnings before interest, taxes, depreciation and amortization (EBITDA) from 7.4.
“Overall, the economic variables that drive M&A continue to be supportive, although there are early signs of an impending slowdown,” according to a recent market update from Grand Rapids-based investment banking and consulting firm BlueWater Partners LLC. “We expect M&A activity to be steady heading into 2019. The availability of capital and the search for talent, products or services, and customers are driving buyers to the market. However, a deterioration in the macroeconomic environment, triggered by the fading effects of the fiscal stimulus and the overhang of a protracted trade war, could force them to hit the brakes.”
Respondents to Detroit-based law firm Dykema Gossett PLLC’s annual M&A outlook survey also offered a bullish view for the dealmaking climate in 2019. Nearly two-thirds of respondents expect the market to strengthen this year, and just 15 percent predict a weaker market. That compares to 39 percent of respondents a year ago who anticipated a better market in 2018, according to results of the Dykema survey released in late October.
Executives answering the Deloitte survey expected larger deals in 2019 with higher transaction values, while Dykema respondents predicted movement to the lower end of the market for smaller deals of less than $100 million where this is less competition among buyers.