Buyer or Seller: Is it a Zero-Sum Game?

February 25, 2020|Ann Hanna

Buyer or Seller: Is it a Zero-Sum Game?

With the U.S. economy in its 10th consecutive year of growth, business owners continue to hear that M&A is a sellers’ market, which to most instinctively means it’s a good time to be a seller and a bad time to be a buyer. This assumes that market status is a zero-sum game, which is not necessarily accurate. We’re finding that in many instances it’s still a very good time to be a buyer and we encourage business owners to understand all dynamics - market conditions are only one part of the equation.

There are current factors widely accepted about the M&A market in 2020:

Excess Capital.  According to Bloomberg, private equity firms are starting 2020 with nearly $1.5 trillion in uninvested capital, up from around $1.0 trillion a couple of years ago based on fundraising activity exceeding the rate at which private equity firms have been able to deploy capital. These record levels of dry powder from private equity funds and healthy corporate balance sheets contribute to the rise of capital availability. Additionally, liquidity in the equity and debt markets combined with cheap lending rates allow buyers access to a favorable lending environment for financing deals.

Continuing strength of the U.S. manufacturing M&A market. While the industrial segment of the economy has suffered a gradual slowdown from late 2018 to now, consolidation in the manufacturing world continues apace. Multiples continue to be strong, if only slightly off historical levels.

Uncertainty. The markets respond poorly to uncertainty and we have plenty of it.  Specifically, the length of economic slowdowns around the globe, Brexit transition, world health risks, impending U.S. elections, and the continuing trade negotiations contribute to fears of disruption of the various markets.

Economic Optimism. A January 2020 CEO survey by Vistage and the Wall Street Journal shows improved confidence by small business CEOs.  Expectations for economic growth, strong hiring plans, and projections for increased revenue and profits propel the increase in overall confidence. The manufacturing sector is expanding as consumer sentiment remains rather strong.

Recessionary fears.  After more than a decade of upward momentum, many believe that a downturn is inevitable within the next few years. Economists speak of the inverted yield curve sending recessionary signals.  Others are very cautious to invest in the stock market due to the large CAPE ratio (cyclically adjusted price-to-earnings ratio).  Even those who do not see economic factors indicating recession, feel we are due for a geopolitical Black Swan Event. 

Declines in Deal Volume. For both the U.S. and globally, 2019 was a year which experienced declines in both deal volume and value. Cross-border M&A activity declined 25%. However, to put this in perspective, 2019 was the fourth largest year for global M&A since 1980 when the industry began tracking statistics.

If you have the desire for a transition, this is a wonderful time to be a Seller because:

  • Deal multiples continue to be at historically high levels.
  • In addition to favorable selling prices, sellers have greater leverage in negotiating other key transaction terms such as transaction structure and risk-mitigating terms.
  • Demand for U.S. companies is increasing as global uncertainty has investors looking more regionally than globally for expansion opportunities.
  • Many corporations must consider strategic acquisitions in order to meet their growth targets and to keep up with rapidly evolving markets, technologies and consumer preferences, which increases overall demand.
  • Huge amounts of available capital at inexpensive rates allows buyers to stretch for deals.

If you’re assessing strategic acquisitions, this is a great time to be a Buyer because:

  • Many sellers see a quick, confidential transaction as very desirable. Despite the fact that a broad auction process could bring them higher values, they feel there is too much risk involved. Nimble, flexible, creative buyers have success in any market.
  • Liquidity and favorable rates provide buyers access to a positive lending environment with which to finance deals.
  • When manufacturers want to supplement existing product lines, or move into whole new product areas, it’s often much easier and quicker to simply purchase a company already doing what they want to do.
  • The cost of a missed opportunity could be a much higher price than a historically high multiple when faced with a unique opportunity. For example, many companies transform their core business through acquisitions in other industries—most notably technology, which remains a top cross-sector M&A target.
  • It could be impossible to meet, even moderate growth goals, through organic growth alone.
  • It will take time to assemble your execution team, buying strategy, and fill your pipeline with possible acquisition targets. Most agree that the next recession will be short and mild. With this anticipated resilience, prepared corporate and private investors should be ready to capitalize in the next downturn. Research shows organizations that are opportunistic with deals in a recession generally outperform their industry peers.

Timing the market is one consideration when buying or selling. Financial attributes of the business, internal state of the business and systems, industry outlooks and personal circumstances also are significant contributing factors.  You can sell at the height of the market, craft a great acquisition or even experience a disappointing sale both in the same sellers’ market, as it depends on the specific characteristics of your company and the deal in addition to the process through which you transact your business. 

We encourage any business owner to begin planning any M&A activities at least a year ahead of time, understand the value drivers of your industry, and discuss your strategy with an experienced advisor who understands the M&A market and is knowledgeable of these and other dynamics relating specifically to manufacturing businesses.

For more information or to explore any questions you might have regarding this article or mergers and acquisitions, please contact Ann Hanna, Managing Director, at ah@taureaugroup.com or any member of the Taureau Group team at 414-465-5555.