What happened to all the M&A in 2012?

With the capital gain rate scheduled to go from 15 percent in 2012 to 20 percent in 2013, and possibly as high as 23.8 percent for some taxpayers, many experts predicted a boom for mergers and acquisitions in 2012.  Their rationale was that many business owners would accelerate their plans to sell in order to capture the lower capital gains rate in 2012.

Overall, though, we have not seen the spike in M&A activity these experts predicted.  What we have seen (with limited exceptions) are buyers who are reluctant to borrow for investments and/or acquisitions.  Cash appears to be king and completed deals are getting done for lower multiples of EBITDA than we have seen historically (2-5 versus 3-10).

Banks are a little more aggressive in lending to borrowers, but nothing like the pre-recession days.  Lenders are looking for both strong cash flow and collateral and will provide financing for those deals that make sense.  Most banks are requiring their clients provide them with some due diligence, including ‘quality of earnings’ reports from accounting firms.

The quality of earnings reports typically show the historical earnings of the target by customer or by product and highlight unusual transactions, both expenses and income, that occurred in the historical financial statements.  They will also usually project earnings/cash flow for at least one year post-acquisition.

Has the level of M&A activity in 2012 surprised you?  Share your thoughts in the comments.

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