This year is starting with even stronger economic indicators than 2019 and that has experts in mergers and acquisitions confident the industry is poised for sustained activity, despite some concerns about headwinds.
Buyers and investors still have a lot of cash to spend, and sellers that can demonstrate solid financials are in “enviable positions,” said Colin J. Keefe, chair of the mergers and acquisitions group of Fitzpatrick Lentz and Bubba, a law firm based in the Lehigh Valley.
Nationwide, about $2 trillion in private equity remains unspent, creating enormous opportunities into 2020 after what had been a solid 2019, said Robert J. McCormack, of Murphy McCormack Capital Advisors in Lewisburg. McCormack also is chairman of M&A Source, a Georgia-based trade group. At is national convention in the fall, M&A Source members were noting that they expect to see an overall strong 2020, McCormack said.
Going into January, interest rates remained low, the stock markets were hitting new highs and trade deals had been announced with China, Mexico and Canada. An end to the Brexit stalemate in Europe appeared to be near, as well. Still, the possible headwinds will include lingering uncertainty over trade, the US election and the fact that a recession is long overdue, several observers noted, adding that businesses naturally dislike uncertainty.
“There was a lot of concern about a recession in the middle of the year,” said Thomas W. Kerchner, managing director of BMI Mergers and Acquisitions, which has offices in the Lehigh Valley, the Philadelphia region and elsewhere. “But right now, it looks very good. There is a lot of money sloshing around in the system.”
Even if activity slows, it only will be in comparison to what has been strong mergers and acquisitions activity in recent years, he and others said. In a Dec. 30 article, the Wall Street Journal reported that deals reached $3.8 trillion globally through Dec. 27, which made 2019 the fourth best year for activity. That was about 4 percent less than in 2018, the journal reported.
Ryan Hurst is a partner, business consulting services group, with RKL LLP, which has an office in Spring Township in Berks County. While the numbers were off nationally, as well as in eastern Pennsylvania, that is in comparison to what had been banner prior years, Hurst said.
“2017 and 2018 were really strong years, so it is a return to normal,” Hurst said, adding that 2020, like 2019, will be marked by some caution in the industry. Businesses don’t like “confusion and uncertainty,” Hurst said.
“Who knows what is going to come up?” Hurst said.
Steady as she goes
For now, though, he and others said that 2020 is starting with a clearer picture than 2019 in some areas. For one, several people noted, federal tax and regulatory policies aren’t likely to change in 2020, with the effects of the 2017 tax reform settling in and the election 11 months off. The national election will give indications about what to expect in 2021, so people will be watching to see what might happen with policies as the winners become clearer, the experts said. In addition to the strong employment numbers statewide and nationally, consumer confidence remains high, and other economic fundamentals are strong. And unlike the start of 2019, 2020 is seeing trade tensions easing, rather than ratcheting up.
“Last year at this time, I was more cautious that a recession was coming,” said McCormack, who pointed out that interest rates remain low, which helps facilitate deals.
So far, talk of a widespread recession has been muted. For years now, the conventional wisdom has been that the country is long overdue for a correction, most likely a mild one and not of the magnitude of the Great Recession 10 years ago.
“No one really knows,” said Kerchner. “There definitely is going to be a recession at some point. But everything is going well, and I don’t see what could upset it.”
Retain your talent
In some cases, the economy is so strong that low unemployment numbers make it difficult for companies to grow, Kerchner said. In fact, Keefe said, the jobless rates have led some companies to seek deals as ways to expand their workforces.
“It’s hard to hire people. You can expand through acquisitions,” Keefe said, adding that dynamic should be a wake-up call for all employers.
“Keep a tight hold on your talent,” he advised. “Good people are not really replaceable right now.”
Some industries, such as the state hardwood industry, have been in a recession even though the overall state economy is strong, McCormack said. That slowdown has been, in part, due to the trade tensions with China, which had been a major market for hardwoods. Overall, a lot of proposed merger and acquisitions activity has involved construction companies, which means that the supply of deals can be higher than the demand, affecting valuations, he said.
Other experts agreed, including Hurst.
“Construction can be a tough one,” Hurst said, especially if there is not something special that a company offers. One enticing element could include a strong workforce, assuming the buyer has done the research to know that the workers will stay.
“It ultimately matters what the work culture is and whether the workers will stick around,” he cautioned.
In Pennsylvania, as well as nationwide, the appetite for deals appears to span across most industries, including health care, technology and manufacturing. Keefe said that companies that have a unique technology are ripe for a deal. Medical-device companies would be an example of businesses that have both a technology and a workforce that can make them attractive. Health care companies that are not heavily regulated also continue to garner interest, several people noted.
The strong economic fundamentals going into 2020 are coinciding with the continuing trend of baby boomers retiring in large numbers. Many of them have no plans for a family member to take over or for an obvious successor. That situation means that they will need to sell. The boomer-led trend will last another eight to 10 years, putting a large number of sellers into the market at a time when there are plenty of well-funded buyers, at least for now.
“Baby boomers are a year closer to retirement than they were last year, so they are a year closer to a sale,” said Andrew Kahn, a shareholder with Concannon, Miller & Co. PC in Bethlehem. However, that doesn’t mean a sale will go through. Deals often fall apart because the seller didn’t properly prepare.
Statistically, about 20 percent of the companies listed for sale actually are sold, Kahn said. Sellers often make mistakes such as not properly getting their books in order or overestimating what their companies are worth.
“Either the seller has crazy ideas about what a business is worth, or they truly are not ready to sell,” he said.
A buyer might be willing to pay a premium if they see the value. Smart buyers will look into every corner, so if the majority of your business is with one customer, it might turn a buyer away, he added. Buyers will look at trends in growth and profitability, and a myriad of other angles, such as whether an acquisition target allows personal perks that can’t be sustained, Kahn said. That means sellers must be pro-active and anticipate such questions before putting a company on the market.
But the sheer numbers involved means that 2020 should be strong for mergers and acquisitions. Kahn noted in the past that there are about 4.5 million privately owned businesses run by baby boomers, with total value of more than $10 trillion. He said in early January that the average age of those business owners is now 64.
Others made similar observations.
“As they age out, it is one of the biggest, if not the biggest, drivers of what we are seeing out there,” Keefe said.
Many owners fail to recognize that the day to sell is coming, eventually, and they need to prepare while there might be a lot of interest and a lot of money in the system, several experts pointed out.
“You are either in control or you are not in control,” McCormack said. “It is better to be in control.”