A few weeks ago, my family and I ventured north to New Hampshire to enjoy some hiking
and take in the fall foliage on a beautiful, clear New England October morning. Having successfully reached the peak of Mount Monadnock (elevation 3165 ft, no small feat for my intrepid six year old daughter), we enjoyed incredible visibility with clear views of the White Mountains to the north and the outline of the Boston skyline visible in the distance to the east, nearly 70 miles away. This was the third time I’ve dragged my family up that mountain in what has unofficially become an annual tradition, but never have we enjoyed the visibility that we enjoyed that day. And while I could pen an article about the merits of New England hiking in the fall, I’ll stick to my day job in middle-market M&A and give a short note about the value of visibility.
In M&A, as in mountain climbing, visibility is your friend. Corporate dealmakers need to act on informed views of future prospects, risks and opportunities. Uncertainty breeds inaction, and while domestic M&A activity has increased of late, it is still recovering from the uncertainty and depths of the Great Recession, when crippled credit markets and a collapse in business and consumer demand led to a sharp downturn in M&A. Until CEOs and boards gain conviction in their own businesses, and until they gain visibility into the future impact of government reform, tax policy and regulatory changes, dealmaking volumes will remain in recovery mode. Throw in an unemployment rate still near 10% and lowered end-market demand, and you can soon see that corporate dealmakers have to climb a mountain of uncertainty. In fact, domestic M&A activity continues to lag behind 2009 figures, with US $481.9 bn worth of deals announced year to date, down slightly (1.6%) from the same period last year.
However, the cloud of uncertainty may soon begin to dissipate. As I write this post, the critical mid-term elections are less than a week away (and have likely occurred by the time you’re reading this). No matter which way the election results tilt, the outcome should go a long way towards increasing certainty about the future direction of regulation, taxes and healthcare reform. The results of the election will give U.S. taxpayers, business owners, corporate managers and their advisors new visibility about their future prospects, as well as changes in their corporate expenses and tax obligations. They may or may not like the direction post-election, but at least they will be in a position to make more informed decisions about their future. Expect the M&A markets to react accordingly.
Still, entrepreneurial markets continue to enable risk taking—for those able to afford it. In the third quarter, several large and cash-rich corporate buyers in healthy sectors took advantage of their capital to make strategic acquisitions. While recovering companies across industries have been socking away cash in the aftermath of the financial crisis, technology companies in particular have been lining their coffers. It’s no accident that a number of the headline deals in the third quarter were in the technology sector, where balance sheets are especially flush.
Like everyone else who makes a living in the M&A business, I enjoyed following the recent duel between tech stalwarts Dell and HP as they sought to top one another in their bid to capture cloud-computing company 3Par. Other recent headline deals included IBM paying a 120 percent premium for Unica Corporation and Intel buying McAfee at a 60 percent premium. If the market will not pay for growth opportunities, acquirers clearly will. Those same dynamics hold true with emerging growth and mid-market businesses which I serve, as large strategic buyers seek to ramp up M&A efforts to acquire needed technology, fill solution gaps and enter new, higher growth areas. A healthcare technology client of mine recently rebuffed a large-cap strategic’s takeover bid at a 10x multiple of its trailing revenue--choosing instead to partner with a different strategic player in a commercial relationship, and pursue a more lucrative payday in the future. They weren’t making the decision lightly, and obviously didn’t have perfect visibility into the future, but growth demands a premium in any M&A market.
Interestingly, while total domestic, year to date $ volume of M&A deals is down slightly from the same period last year, total deal count is up by 25.4% , indicating smaller deals are increasingly getting done. With improvements in the financing market, an increase in private equity activity, and a seemingly more stable economy, the pieces are in place for more robust M&A activity going forward. The mid-term elections should lead to increased visibility in taxes and the regulatory environment, setting the stage for an increase in corporate dealmaking. Like the view I enjoyed from the top of Mount Monadnock on a clear October day, there is hope that the corporate dealmaker’s visibility will soon improve.
Grant Grava is a Director at Covington Associates. He can be reached at 617-314-3950 or ibankerblog@covllc.com.
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