M&A professionals in Michigan feel a little more optimistic than their counterparts nationally about the prospects for stronger deal flow over the next year.
In the annual M&A outlook survey by law firm Dykema, 45 percent of respondents in Michigan said they expect the market to strengthen over the next 12 months. That compares to 33 percent of respondents nationally who anticipate stronger M&A activity ahead in 2017.
The difference between the state and national responses could stem from the auto industry’s strength and the resulting optimism it has caused in the state.
Large suppliers that are looking to buy smaller, down-market companies and add a specialty or expertise — particular in a new technology — may also contribute to the difference, said M&A attorney Brian Page, a partner at Dykema’s Grand Rapids office.
“As the auto industry arguably becomes a tech industry, it may be a reflection of the continuation of how auto companies have to become much more highly-developed tech companies because of the technology of the automobiles now,” Page said.
That tendency could also account for the higher percentage of Michigan respondents — 77 percent in the state versus 68 percent nationally — who expect to see more transactions over the next 12 months involving privately-owned or family-owned companies.
“There are still lot of smaller-tier suppliers to be gobbled up by the big guys,” said Tom Vaughn, co-leader of Dykema’s M&A practice in Detroit.
Each fall, the law firm surveys CEOs, CFOs, business owners and M&A professionals across the U.S. to gauge activity and their expectations for the year ahead.
Results from the 2016 survey found reduced optimism overall in the M&A market, although activity is coming off of a string of strong years. The one-third of survey respondents nationally who expect a stronger M&A market in the next 12 months compares to 37 percent in Dykema’s survey a year ago and 59 percent in 2014.
The results indicate that many M&A professionals believe the market peaked in the last year and, as expected, is now cooling, although just a small percentage expect activity to weaken considerably, Vaughn said, adding that pessimism remains low.
“This is a leveling off. This is not a falling off of the M&A market,” Vaughn said. “I don’t hear anybody complaining about not having enough work.”
Fewer than 20 percent of the respondents expect the market to weaken in 2017 and 47.2 percent “expect no significant change.”
Given the strength of the M&A market over the last few years, industry professionals have come to expect an easing of activity, Vaughn said.
“A lot of people have been expecting this to happen at some point because it’s been such a hot market up to this point in time,” he said. “We’re coming off some pretty high highs.”
That movement is reflected in recent reports on M&A activity in the U.S during 2016.
Thomson Reuters reported a 4.5-percent decline in middle-market deals nationwide for the 12-month period that ended June 30, compared to the 12 months that ended Dec. 31, 2015. PitchBook reported a 16-percent decline in private equity-backed, middle-market deals completed through the third quarter.
Matt Miller, managing director at investment bank Blue Water Partners LLC in Grand Rapids, said business has been “holding steady” through 2016. The M&A market remains good, said Miller, who also describes activity as “leveling off” from the highs of the last few years.
Even with that flattening of the market, Miller does not see any major decline in activity.
“It’s been a good run,” he said. “We expect things to just keep humming along.”
Nearly half of respondents to the Dykema survey cited the availability of capital as being the most responsible for fueling M&A activity, while 25 percent named favorable interest rates.
For the first time since 2008, financial buyers had the most influence over deal valuation in the last year, at 48.6 percent, followed by strategic buyers at 43 percent and foreign buyers at about 7 percent.
Among the survey respondents who anticipate a stronger market in the next year, 31 percent said aging business owners seeking to sell will drive the deal flow, followed by another 29 percent who have concerns about “the window closing” on their opportunity to sell, according to Vaughn.
High valuations, the availability of quality acquisition targets, and the competition for deals, respectively, ranked as the top barriers to transactions in the last year.
MORE DEALS FOR SMALL FIRMS
Among small businesses in the U.S., deal volume remains high and in the third quarter reached the best level since the spring of 2008, according to BizBuySell.com. The website reported a 15.2-percent increase in the transactions it handled in the third quarter compared to a year earlier.
Business broker Max Friar, the managing director of Calder Capital LLC in Grand Rapids, said his business has been strong this year.
“West Michigan seems to be really hot. Buyer interest is strong,” said Friar, who typically handles transactions with a value of $1.5 million to $2 million.
Barring any event that shocks the economy, Friar expects the present market to continue in 2017 in West Michigan.
“I feel like the fundamentals in this area are as good as they’ve ever been,” he said. “I think West Michigan will hold up just fine.”