Although 2016 didn’t match 2015 in terms of the number and value of M&A transactions (see Figure 1), activity was still brisk. Some factors contributing to the slight slowdown include political uncertainty in an election year; some unpredictable global geopolitical developments; and regulations, or the threat of regulations, which stifled some deals.
At the same time, the 2016 M&A environment benefited from ongoing low interest rates, high valuations, and investor pressure to achieve growth not met through traditional/organic means. The 2016 deal arena also became a more competitive place as both strategic and private equity buyers started looking at more facets of targets’ operations, including cultural/organizational, management, and technology issues. Due diligence became a more in-depth process as buyers delved into forward-looking analytics. This thoroughness resulted in some deals falling through, but those that did get finalized were often highly valued.
In this regular EKS&H M&A Trends update, we take a look at the new year and what M&A trends are expected to emerge.
The Current Landscape and Industry Opportunities
Dealmakers’ confidence, production, and economic strength are all high, and companies are looking to grow. When they can’t grow organically, acquisition of companies that can provide new product offerings or alternative distribution methods is another option, especially with capital readily available and interest rates still low.
Sellers may be motivated if they were unable to complete a deal in 2016 and sense that the current high valuation environment may not last. Demographic changes might mean that more targets become available in 2017 as baby boomers continue to retire. Sellers are also hopeful that favorable tax changes (reductions in tax rates, including capital gains) may be made by the new administration.
Several industries are likely to experience particularly strong activity:
Construction materials will be needed to feed the strong housing market. According to Forbes, housing construction strengthened in 2016 with starts up to 1.2 million (annual rate) in August.
Technology companies are being purchased by other companies across industries that require a technology component to thrive and grow. Additionally, according to Fortune, a pro-business Trump administration may allow more tech deals to become possible.
Other industries that may experience increased activity include consumer products (being fueled by the strength of the economy, higher wages, continued consumer spending, and home starts), healthcare products (especially medical devices, which are in demand as the healthcare industry continues to thrive), and oil and gas (which may see a potential or partial recovery in oil prices, giving the industry as a whole a boost).
However, smaller companies are likely to be left behind and, therefore, in a good position to be scooped up by larger companies.
Both buyers and sellers should be wary of potential pitfalls within the current environment. One of the most important is negative discoveries during diligence, which can delay or kill deals. Sellers should be especially careful to anticipate possible dings (see advice for sellers below). Another possible obstacle is the inability of buyers and sellers to meet in the middle on price; however, savvy dealmakers can usually find creative ways to make deals happen. Finally, a lack of cultural or organizational fit can be problematic; buyers are looking more closely at integration issues post-close.
Advice for Sellers: Drive Value
Sellers need to prepare their businesses for sale from two directions. Never has the premium paid for top performers been higher. First, mitigate risk factors. Given the current climate, any kind of risk profile will become a liability during valuation. Therefore, sellers should look closely at, and rectify, any area that might be cause for concern. For example, getting technology systems up to date and ensuring a strong management team. The other direction is improving already positive aspects of the company, including sales, products, and markets. Diversifying these elements is an essential way to drive value.
Advice for Buyers: Maintain Discipline
Buyers should come to the buying process with a particular motivation in mind and not switch to something else mid-sale. For example, imagine Company A wants to acquire a technology firm that can help it produce its banner product, Widget Z. Company A should be looking very closely at whether targets are fully capable of the processes involved in producing Widget Z, rather than identifying that a target can help with some aspects of the process but not others and still going ahead with a sale just to add technical capability. Once targets are identified, buyers should resist the temptation to cut corners during diligence to ensure a good fit and the likelihood of successful integration post-close.
Dealmakers have every reason to be optimistic about their ability to complete transactions in the coming year due to many positive factors. However, both buyers and sellers should be wary of possible obstacles and take specific steps to ensure successful deals.
EKS&H transaction services offer more than 25 dedicated professionals with extensive industry, accounting, and financial experience. Our CPAs, CFA Charterholders, ASAs, and ABVs work on more than 60 transactions per year using experience, technology, and tools that provide greater understanding to all parties concerned.
To find out how our services can help ensure your next transaction is a success, contact Joanne Baginski at 303-740-9400 or firstname.lastname@example.org.