If you have been waiting for a recovery in the M&A environment, we have bad news: you will most likely have to wait until well into 2014. By almost all accounts, the M&A market has yet to snap out of the doldrums.
Back in 2008 and 2009, we could blame the problem on a dearth of available financing; however, today there is plenty of cash on corporate balance sheets. Lenders are more than willing to finance good deals. So, what gives? The reasons are diverse, including concerns over a do-nothing Congress, questions about the sustainability of global growth, and the increasing cost of business resulting from recent legislation, to name just a few. But perhaps the most significant obstacle is simply the shellshock of the credit crisis. We saw this phenomenon during another time in our history—the Great Depression—after which it took almost 15 years to see M&A return to pre-Depression levels.
With M&A volume meandering sideways, the fact that valuations are stagnant should also come as no surprise. Middle market M&A multiples continue to remain in the 4X to 6X EBITDA range, and sometimes higher in the case of acquisitions by strategic buyers.
While this all might sound depressing, it should not be. For companies with an interest in growing through M&A, conditions could not be much better. Between cash balances and available credit, there is plenty of financing available to fund good deals. Next, the Federal Reserve and other central banks have indicated a commitment to maintain low interest rate environments. Additionally, Baby Boomer retirements and generational transitions in family-owned businesses should continue to result in buying opportunities. Finally, the absence of frothy valuations typically present at this stage of a recovery have not yet materialized, increasing the likelihood of M&A success (when measured in terms of ROI). This last point is particularly important, because M&A failure rates tend to increase dramatically as asset prices increase.
Despite the favorable environment, it is important to remember that M&A is fraught with risk. To maximize your probability of success, keep the following four points in mind:
- Make sure you have an M&A strategy. Clearly defining business objectives you intend to accomplish through M&A can help identify a broad pool of targets, sift through those targets to identify the best fit, and minimize merger premiums.
- Start small. Successful acquirers tend to grow through a large number of small acquisitions, rather than “betting the farm” on a single transaction.
- Set a walk-away price. The best acquirers set a maximum price early on and stick to it.
- Do not fall in love with the deal. Negotiating a deal is exciting, but walking away is not. Call it what you want—pride, hubris, delirium—but the sheer desire to close the deal often leads incredibly brilliant people to do incredibly stupid things. Hit the pause button from time to time and ask the advice of those you trust.
Importantly, we are always here to help, so contact us if you would like to learn more about developing and executing a successful M&A strategy for your business.