M&A makes new millionaires, puts business growth on a fast track
By Terry Troy
There was a time in this country, when Leave It To Beaver was on television and the cost of gasoline was under 24 cents a gallon, that the American Dream consisted of owning a home with a white picket fence. Families had two children with perfectly straight teeth and the fenced in yard had two cats or a dog, depending on your preference.
That new home might cost you only $12,000.
Despite the current administration’s best efforts to “Make America Great Again,” those days are sadly long gone. They have been replaced by an ever-increasing appetite for business growth and technological advancements that come almost hourly, all set against an increasingly competitive world market.
The present administration cannot put Leave It To Beaver back on the tube nor drop the price of a house down to $12,000. However, its policies have created a fecund business environment that just may fulfill the new American Dream, which is simply economic independence.
At the core of this new business model sits the Merger & Acquisition (M&A) market.
For sellers, it’s creating a new class of millionaires, young entrepreneurs who are selling off new technologies to major companies. As such, the M&A market is actually fueling entrepreneurship and technological innovation while creating jobs at emerging small businesses.
However, M&A activity is also providing older independent business owners an easy glide path into retirement. And it’s creating new millionaires out of shareholders and stakeholders in companies that are being gobbled up by larger companies in ever increasing numbers.
There are some casualties in the form of displaced employees whose positions have been duplicated in the course of a merger or acquisition. But with today’s robust job market, many soon find new opportunities elsewhere. The reality is that businesses need to grow to survive. Stasis is not an option.
So for many businesses, acquisitions have become a business imperative, necessary to compete in a complex world market—a faster way to acquire new customers and technology while facilitating growth.
With those underlying market dynamics, is it any wonder the M&A market is on fire today?
According to a report from Deloitte entitled “The State of the Deal, M&A Trends 2019,” corporate and private equity executives focused on M&A anticipate further acceleration of deal flow across 2019, both in the number of transactions and their size, thus extending several years of record M&A activity. The U.S is also a leading market for M&A activity. In its second quarter 2019 report, Mergermarket, a leading international provider of M&A data and intelligence, said that all but 10 of the largest deals all targeted U.S. companies with six of the 10 being the result of domestic consolidation.
In SunTrust’s annual Business Pulse Survey, preparing for an M&A was among the top three priorities of business leaders in the middle market. The survey found that 28% of middle-market leaders have identified M&A as a top growth strategy, up from 26% in 2018 and 20% in 2017.
The Need for Speed
“The reasons companies pursue acquisitions are multi-faceted, but one of the most common themes is speed,” says George Calfo, managing director of SunTrust Robinson Humphrey. “In some cases, it presents less risk to acquire versus to grow. In an era where scale seems to have significant business advantages, people are acquiring versus organically growing as a way of achieving scale—it’s almost defensive.”
Monte Repasky, managing partner of Ernst & Young’s Cleveland office, agrees.
“The advantage (of acquisition) comes in the form of speed to market and creating immediate solutions,” he says. “We see that companies are looking to acquire the innovation and technology they need to accelerate growth in the short term. But these acquisitions also create synergistic relationships and strengths for a long-term impact.”
“For mature companies, organic growth is slow,” adds Scott Mashuda, managing director of River’s Edge Alliance Group, a Pittsburgh-based lower and middle market banking firm with offices in Westlake, Ohio. “Growth through acquisition accelerates a company’s growth trajectory in both the short and long-term. An acquisition may create some short-term challenges such as integration and continuity, but long-term benefits include cost savings, increased operating efficiencies and cross-selling opportunities,” among others.
Today, stakeholders and shareholders are demanding speed, “or said in a different way, stakeholders are becoming increasingly impatient because they have capital to deploy and they have alternatives,” says Calfo.
And many companies today have access to more capital than ever before. According to Ernst & Young’s most recent Global Capital Confidence Barometer, respondents signaled continued growth in corporate earnings in 2019, even after the high benchmark hit in 2018. Technology and globalization have created a competitive landscape and make M&A more of an imperative.
“Using new technology and artificial intelligence, companies are increasingly able to automate routine administrative tasks to free up both capital and talent, which can then be invested elsewhere,” says Repasky.
While those two factors have increased business liquidity, the current administration’s general business policies have also contributed heavily to the growth of M&A activity, according to virtually all business leaders queried.
“Generally speaking, government policies, such as the tax cuts at the end of 2017, have had a positive impact on most businesses in terms of cash on hand,” says Calfo. “But the general economic environment has also contributed heavily to cash balances and liquidity in the system. Productivity gains have contributed and so has central bank policy.”
When you think about the M&A market and the business environment, you need to think about critical dimensions, which include confidence, liquidity, financing, appetite and valuation, says Calfo.
“And I would say that the most important of those is confidence, and business confidence is quite high right now,” he adds.
With smaller companies, the increase in M&A activity is also driven by an aging demographic. Keate Partners out of Cincinnati is an M&A company that specializes in the sale of small to medium-sized businesses.
“We have seen a lot more activity this year, and I believe it is a long-term trend that should continue as baby boomers approach retirement age,” says Randy Sircle, a partner in the firm. “Every day more people hit retirement age, and some of those people are business owners. We have built a niche in representing companies that need professional representation, but not an investment banker.”
Clouds on the Horizon?
While the outlook for M&A activity appears on the surface to be as rosy as an episode of Leave It To Beaver, there may be some impediments to future growth. Will global tensions, our trade war with China and volatile markets have a negative impact on either business confidence or M&A activity?
It’s not very likely, according to M&A executives.
“Executives cite a range of challenges to their growth plans, but they mainly fall into two categories: the increasing costs associated with doing business and increasing competitive pressures,” says Repasky. “In our most recent Capital Confidence Barometer, 48% of manufacturing executives surveyed listed regulation and political uncertainty as the biggest risks to deal making. This uncertainty includes tariffs on key imports like steel.”
And manufacturing companies tend to be more conservative than those in other sectors, especially when inputs are affected by tariffs, Repasky says.
“We are seeing U.S. manufacturers looking outside of China and even considering onshoring opportunities,” he says. “Larger companies are considering emerging markets such as Brazil to fuel growth, and India is likely to become a target market in the future.”
The same is true of companies in the middle market.
“Tariff and trade tensions can certainly cause some folks to re-evaluate capital deployment because of the unpredictability,” says Calfo. “You also have some businesses that are subject to tariffs where you might see some margin deterioration, which has a growth impediment to it.”
But liquidity has masked a lot of the clouds on the horizon, Calfo points out.
“We see the Iranians capture an oil tanker in the Straights of Hormuz, and normally we would see oil spike on that news. But that has been muted,” he says. “Why? It’s a combination of both the liquidity in the system and the notion that there are greater supplies elsewhere.”
Smaller companies don’t seem to be as greatly impacted by international events as they are by the business climate in general, says Sircle.
“The size of companies we market typically aren’t as affected by external conditions as larger companies are,” Sircle says. “They control their own destiny a little better than a publicly traded company.”
A New Skipper at the Helm
There is one very large uncertainty on the horizon that will impact the M&A market: the 2020 election. A new president at the helm could adversely impact business confidence and the M&A marketplace.
“Anytime there is uncertainty, markets are affected,” says Mashuda. “From a private capital markets perspective, I think what business owners want to know is: Will the post 2020 president be pro-business? We currently have a pro-business president and you can see the results.”
Could election uncertainty actually speed up M&A activity through the end of this year and early next year as business owners try to cash in while there is still time?
“That’s an interesting question,” says Mashuda. “It may. As you know, markets don’t like uncertainty and election years create an uncertain political and business environment. In anticipation of a potential changing landscape, I would say, yes, there is a very real possibility that business owners may accelerate their exit plans in anticipation of a less pro-business environment post-election.”
“It would be a very bad thing for our country and our industry if Trump is not reelected,“ says Sircle, who is an admitted supporter of the president. “But it might actually create a short-term boon for our industry as business owners, who are thinking about it anyway, head for the door—especially if some radical liberal gets elected. A lot of business owners might want to sell.
“However, in the long term, it would be very bad. All of a sudden you would have too many businesses on the market. And you would have to find buyers, which would be a lot more difficult.”
Others are not so sure the election will have that big of an impact.
“The administration has been business friendly and that certainly has been a contributor from our perspective,” says Calfo. “However, if folks feel or get a sense that the economic engine is going to continue and the White House isn’t going to derail or change the general direction of the economy, I don’t think it is going to have as much impact as some people may think. Although people will talk about it.”
There are people who are already taking steps, Calfo admits.
“We do a lot of transactions,” says Calfo. “In the last month, I have heard, not a chorus, but three or four people, who are sellers by the way, who are thinking about a transaction because they are unsure about the election and would like to do something before.
“So it is an interesting question.”