The Future Looks Bright

Mar 01, 2016
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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.

Consistent with last quarter, M&A deal volume in the United Stales decreased in the fourth quarter of 2015 compared to the third quarter, while deal value increased.

According to FactSet Mergerstat, year over year, both deal volume and total deal value increased.

The outlook is positive, and M&A advisors are expecting a 60% net increase in new deals in 20 16. Compared to a year ago, optimism has grown, with advisors anticipating:

  • Greater deal flow
  • Increased business exit opportunities for sellers
  • Opportunities for growth and general business conditions

"Advisors are still optimistic that general business conditions will be solid again this year," said Joe Lindsey, CBI, M&AMI, President of JLC, Inc. and M&A Source. "Nineteen percent indicated some pessimism that conditions will deteriorate, which may be attributed to the upcoming election, a continued slump in oil prices, or the early 2016 drop in the stock market."

Meanwhile, deal multiples remain strong, but advisors aren't optimistic that multiples will climb any higher in 2016. Notably, advisors also suggest market conditions will remain relatively neutral when it comes to debt financing. However, they report some difficulty arranging financing for companies with revenues of $500,000 or less.

The sectors seeing the largest increase in volume in the past three months over the same three months of the prior year include technology services, industrial services, consumer services, finance, and non-energy minerals. Of the 21 sectors reported by FactSet Mergerstat, nine saw increases in value, while 12 saw decreases.

The sectors that have seen the biggest increases in activity in the past three months relative to the prior year include commercial services, health services, distribution services, and retail trade. The sectors seeing the largest declines in volume include technology services, industrial services, consumer services, finance, and non-energy minerals.

GF Data Resources, LLC, whose database consists solely of private equity buyers, reported a decrease in deal value (6.5x versus 7.0x EBITDA) and a decrease in deal volume (62 versus 65 transactions completed) in the fourth quarter. As we analyze the data, it indicates some signs of shifting in this "seller's market."

In the GF Data® sample, valuations strengthened in the smallest and largest TEV tiers (see chart below).

Their report indicates that firms with above- average EBITDA margins and sales growth rates were rewarded with better valuations; the "quality premium" has never been greater. Similar companies were valued in buyout transactions at an overage of 7.4x in 2015. Larger deals saw record valuation levels and were accompanied by unprecedented levels of debt.

As of Q4 2015, GF Data reports an increase in total enterprise value as a multiple of EBITDA in three of four size categories during 2014 as shown in the following table:

These findings are fairly consistent with the MarketPulse Third Quarter 2015 report, which tracks deal activity for Main Street or smaller companies up to $50 million in purchase price. As shown in the table below, for smaller companies, for which leverage ratios have not risen as much as for larger companies, deal multiples have remained fairly steady over the past five quarters. The only category showing an increase in valuation multiples during this time is the $5 million to $50 million enterprise value range, where increased leverage has been utilized to support higher purchase price multiples.

Valuation Multiples

Valuation multiples haven't seen much change over the last six quarters. Multiples remain strong, at or near market peaks.

At Wipfli Corporate Finance Advisors, we have seen continued strong demand by private equity and strategic buyers, particularly for platform and add-on acquisitions with strong growth prospects, EBITDA margin reflecting a niche or value-added product or service, and quality management. Capital remains readily available in the near term, outpacing the supply of qualified sellers. In an environment reported to be a seller's market for deals valued at $5 million or above and a buyer's market for deals valued less than $5 million, it makes one wonder if we will see more roll-up strategies or a continued shift by private equity buyers to do smaller deals. Tremendous value growth is available in size and scale.

The right time to sell is based on many factors, certainly including the company's financial performance and owners' goals and objectives. For companies with marginal performance, we strongly recommend working with Wipfli and Wipfli Corporate Finance Advisors to examine transition options at least two years prior to a planned exit and preferably three to five years prior. For companies with EBITDA margins that are consistently 10% or greater, growth prospects, and a quality customer base, exit options remain plentiful. Advisors participating in the MarketPulse survey report that the length of time to complete a deal has increased in 2015 over 2014, illustrating the importance of utilizing a skilled M&A advisor in an increasingly complex and uncertain environment. Our skilled WCF team brings not only buyer relationships, but on understanding of what various buyer groups value and evaluate and how to negotiate through obstacles that arise. 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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