Contrary to Market Feel, Deal Numbers Are Down, But Deal Dollars Are Up

Sep 28, 2018
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.

Valuations for the quarter averaged 7.4 times adjusted EBITDA, though well above the first quarter of 2018, but below the third and fourth quarters of 2017. Many believe this is due to facts and circumstances concerning the transactions and not the trend of the market.

The 47 completed deals in the GF Data® cohort represent a drop from 63 in the first quarter and 57 in the year-ago second quarter. Those reports seemed at odds with our impressions of the market and others in the industry.

For deals closed in the second quarter, according to GF Data “The launch period would probably have been the fourth quarter of last year. It is possible that uncertainty over trade policy, impending federal tax changes and broader market conditions created a stutter step in deals coming to market.” Whatever the explanation for the second quarter dip, deal volume shows continued vitality. The question remains: How long will this last?

"The M&A market is linked to confidence, corporate fundamentals and external forces like financing."

Multiples remain strong at 7.0 in YTD 2018. While this is below 2017’s 7.3, it exceeds 2003 through 2016.

The above table details “quality premium.” Quality premium is the increase in valuation for above-average financial performance. The premium for year-to-date 2018 was 26% compared with 19% in 2017 and 5% from 2003 to 2016.

"The positive outlook for North American M&A persists, with United States GDP growth in the first quarter coming in above 4%."

Debt utilization in the first half of 2018 remained in line with leverage in the prior year, although leverage has ticked down slightly over the past five quarters.

Utilization of debt continued to stay high, similar to prior years. The 2017 multiples, which were 3.4 for senior debt and 4.2 for total debt, slipped slightly in 2018 to 3.3 and 4.1, respectively. This is one factor in recent high valuations.

Interest rates are also believed to be influencing debt. Financing is readily available today. While rates are rising in North America (Europe, not so much), they are still historically cheap.

Buyers and their CEOs seem to be more active in disposing noncore assets and adding to current opportunities. According to a recent Ernst & Young report, “Nearly a third of executives have increased the frequency of portfolio reviews in the past three years.” The positive outlook for North American M&A persists, with United States GDP growth in the first quarter coming in above 4%, adding to business executives’ view of the economic future.

The PE industry manages over $2 trillion in North America and Europe. PE institutional investors continue to increase allocation targets to PE given recent returns. This results in an increased population for buyers of strong, quality sellers.

Overall, deal pricing remains robust, and buyers are paying premiums for quality deals. If you are looking to sell, now is a very good time to consider a deal. Let Wipfli Corporate Finance (WCF) help you achieve these premiums before the market changes. Our team of experienced advisors work with you to identify the right buyer that will allow you to reach your goals and ensure the proper succession and longevity of your business. Contact us to learn more about how WCF can help you skillfully navigate the M&A process.


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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