M&A Market Remains Strong Amid Economic and Market Volatility

Sep 01, 2015
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Market Updates

Please be aware: More recent data has been published since the time of this post. To see current market trends, check out the most recent issues of Market Updates.

The 2015 M&A market continues to operate at a healthy pace with continued strong demand by buyers who are willing to pay valuation premiums for quality companies. With global economic turmoil in the background and U.S. interest rates poised to increase in the near term, many believe valuation multiples have peaked in this sellers' market. The quarterly and year- to-date transaction data suggests valuations are leveling overall but that buyers remain willing to pay a significant premium for sellers with above-average financial performance, growth, and continuing management.

According to Zephyr, the number of North American deals has declined slightly through the first half of 2015, while total deal values have increased slightly. There were 2,562 transactions worth a combined 62.4 billion in Q2 2015 compared to 2,665 deals worth a combined 61.2 billion in Q1 2015.

Business services led the quarter's activity with the highest number and value of deals. Ongoing consolidation in the oil and gas industry resulted in the second highest deal value this quarter with five of the top 20 transactions in this sector.

At the bottom of the pack in volume this quarter are acquisitions of insurance carriers, while the lowest this quarter in deal value are transactions of wholesalers of durable goods.

In the private equity space, GF Data® reports a slight decrease in the number of deals its private equity subscribers closed, from 53 in Q2 2014 to 49 in Q2 2015, and overall multiples comparable at 6.6x and 6.5x total enterprise value/EBITDA, respectively. Total North American private equity activity remains robust, increasing 15% to 848 deals in the second quarter compared to 735 in the first quarter. Perhaps most intriguing in this quarter's GF Data report are the valuation premiums received by sellers that have professional management in place and those whose EBITDA margin and revenue growth rates exceed 10%, or one above 12% and the other at least 8%, defined as above- average financial performers. In buyout transactions from institutional sellers that have above-average financial performance and a post-closing management team in place, transaction values were 36% higher than for other sellers. This is an increase from the historical quality premiums in the 11% to 14% range in the prior two years. In other words, sellers in the current market are being heavily rewarded for growth, financial performance, and having a management team in place post-transaction.

The lending environment remains favorable, with average debt levels on deals completed in the first half of 2015 of 4.3x EBITDA for total debt and 3.4X EBITDA for senior debt, according to GF Data. In the lower middle market, senior debt/EBITDA is reported to be 2.7x EBITDA for transactions with total enterprise value between $10 million and $25 million. Senior debt financing on transactions less than $10 million of value can range from 2.25x to 2.7X based on our experience within the Wipfli client base.

The right time to sell is based on many factors, certainly including the company's financial performance and owners' goals and objectives. Uncertainty in the domestic stock and commodity markets and global economy can add a layer of uncertainty that highlights the importance of using a skilled transaction advisor.

At Wipfli Corporate Finance Advisors, we continue to see strong demand from private equity, corporate, and foreign buyers. lenders remain committed and aggressive toward new credits. Liquidity and capital options remain strong for companies seeking growth capital and owners seeking an exit or partial recapitalization. Options for companies with stagnant growth, consolidating markets, and management holes are more limited but still strong. We have several family office, private equity, and individual buyers interested in these types of opportunities. Our skilled WCF team brings not only buyer relationships, but an understanding of what various buyer groups value and evaluate. Opportunities abound to skillfully negotiate favorable valuation for our client sellers.

 


The content of this material should not be construed as a recommendation, offer to sell or solicitation of an offer to buy a particular security or investment strategy. The content of this material was obtained from sources believed to be reliable, but neither Wipfli Corporate Finance Advisors, LLC nor RKCA, Inc., warrants the accuracy or completeness of any information contained herein and provides no assurance that this information is, in fact, accurate. The information and data contained herein is for informational purposes only and is subject to change without notice. This material should not be considered, construed or followed as investment, tax, accounting or legal ad vice. Any opinions expressed in this material are those of the authors and do not necessarily reflect those of other employees of Wipfli Corporate Finance Advisors, LLC or RKCA, Inc. Investing in the financial markets involves the risk of loss. Past performance is not indicative of future results.

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