Looking Back, Looking Forward, Looking Up!
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.
M&A activity finished strong in 2017, despite some deals choosing a January close for tax purposes, which potentially underinflates the 2017 volume and buoys January 2018 volume. Factset reports a total 2017 deal volume of 11,673 deals worth $1.7 trillion. January deal volume increased, totaling 910 deals versus 819 in December.
Valuations remain strong in the middle market, with GF Data® reporting an “eye-popping continued surge in valuations in the fourth quarter” from its 201 contributing private equity sponsors. Valuations in each subset of its data, sorted by total enterprise value, increased in 2017 over 2016 (see “Total Enterprise Value”).
M&A activity finished strong in 2017.
Size, financial quality and management quality were factors contributing to higher deal value.
Technology leads the field in terms of deal multiples by industry, with an average of 10.2x EBITDA in 2017, with the rest of the pack coming in at a fairly tight range from 6.6x for Other to 8.2x for Media and Telecom. Once again, size, financial quality and management quality were factors contributing to higher deal value.
We have seen continued strong demand by private equity and strategic buyers.
So what does this all mean looking forward to 2018? Virtually all surveys point to 2018 being a very good year. Several factors will continue to drive M&A in 2018, including:
Global economic strength: In 2018, 75% of major economies are expected to generate more than 2% GDP growth, compared to only 57% in 2011, according to Citi’s Financial Strategy and Solutions Group.
U.S. corporate tax cuts providing increased net income and cash: An estimated 12% increase in cash flow is projected for the median U.S. firm in 2018.
Repatriation of offshore profits and investment dollars: Several notable investments — including FoxConn, Alibaba and Apple — have heard President Trump’s message, “We will follow two simple rules: Buy American and hire American,” and are increasing their investments. This should fuel additional profit and downstream activity.
Technology tools: Deloitte’s M&A Trends 2018 report, which includes feedback from more than 1,000 executives at corporations and private equity firms, states that almost two-thirds of respondents are using new M&A technology tools to assist with reporting and integration. Respondents say the tools help reduce conflicts, costs and time — key factors in making more deals work.
Technical innovation: In addition, the Deloitte report states that technology acquisition is the new number one driver of M&A pursuits, ahead of expanding customer bases in existing markets or adding products and services.
About 68% of executives at U.S.- headquartered corporations and 76% of leaders at domestic-based private equity firms say deal flow will increase in the next 12 months, according to the Deloitte report. Further, most respondents believe deal size will either increase (63%) or stay the same (34%), resulting in continued favorable deal multiples.
At Wipfli Corporate Finance Advisors, we have seen continued strong demand by private equity and strategic buyers, particularly for targets with strong growth prospects, EBITDA margin reflecting a niche or value-added product or service, and quality management. We are working on several new deals whose owners have been on the fence, contemplating when to sell, and ultimately said now is the time. Given the demand by buyers in the market and the opportunity to garner a premium price for the right business markers, it is imperative that middle-market companies engage a quality M&A advisor to help position them for greater success. Your experienced team at WCF Advisors knows how to prepare the business and effectively sell its strengths. We also have in-depth knowledge of active buyers and a sale process that yields results!
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