Is The National Market Rebounding Towards a Seller’s Market Again?
By Claudio Calado, CM&AA, Managing Director, Doeren Mayhew Capital Advisors
The merger and acquisition (M&A) market showed signs of decline in 2016 from the successive highs it set in terms of number of deals and deal value in 2014 and 2015, respectively. Prior to those years, and since the financial crisis in 2009, overall M&A activity in the United States had successively increased for the most part year-over-year until reaching record levels of deal volume and values in 2015.
The Past Indicators
Early 2015 was considered a “seller’s market” for middle-market businesses, however, that only lasted until M&A activity began to “taper off” in 2016 as deal volumes and valuations decreased. In general, this trend coincided with banks beginning to tighten lending standards for commercial and industrial loans in late 2015, continuing throughout much of 2016. Generally, most acquisitions are leveraged, so tightening lending standards typically decrease M&A activity. Given the inverse correlation between lending standards and M&A activity and valuations, the market perception of a tapering off in 2016 seemed justified. Data points through the year confirmed it as a decline in M&A activity (measured with number of deals and value) from its all-time highs in 2015. It wasn’t until the last quarter of 2016 that M&A activity, specifically number of deals, showed some strength exceeding significantly the performance recorded during the same quarter in 2015 – ultimately helping 2016 reach a record-high number of M&A deals overall. Although deal volume was up in 2016, mainly due to the spike in fourth quarter activity, the overall deal value did decline from the previous year, supporting that valuations and deal value in general were indeed dropping or tapering off from its highs in 2015.
With the exception of fourth quarter deal volume in 2016, the decline of overall M&A activity for the year occurred during a time when the market continued to be underpinned by an abundance of liquidity. While the levels of capital raised by private equity firms on an annual basis in 2016 has changed little since 2013, the cumulative capital overhang – amount of money raised by private equity and real asset funds uncalled – actually increased as a consequence of declining M&A activity. Considering the liquidity positions at corporations along with the capital overhang, a similar trend in overall liquidity was observed last year increasing to $2.1 billion from $1.9 billion in 2015. Accordingly, liquidity remains abundantly available in the marketplace and itself could not be considered a cause of the M&A activity decline observed in the first three quarters of 2016.
What’s Ahead in 2017
With a little over a quarter of the year behind us, 2017 activity appears to be favorable and in fact rebounding. First-quarter data reports shows activity in terms of deal volume and value exceeded the levels reported during the same period in 2016. This may come as a surprise considering the anticipation that the Federal Reserve would tighten monetary policy throughout the year by increasing (federal funds) rates. This approach typically increases the cost of credit and tends to be less favorable for deal making. Despite the rate hike in March 2017 and additional rate increases expected throughout the year, the overall outlook and sentiment for the U.S. economy remains positive, and in fact, appears to counter the increased credit market costs.
Since the presidential elections in November 2016, the equity markets have developed favorably with the Dow Jones Industrial Average rising 16 percent through March 2017 and setting an all-time record high of 21,115.55 points. Equally, the S&P 500 Index rose 14 percent for the same period, closing at an all-time high of 2,395.96 points (while on an intraday basis it did exceed the 2,400 point mark).
Besides the equity markets, the consumer confidence index (“CCI”) in the United States has been edging higher since the election as well. Based on a survey conducted by The Conference Board, the CCI takes into consideration three key factors:
- Consumer sentiment measuring how people, or consumers, currently feel
- Current economic conditions measuring how consumers feel the general economy is doing
- Consumer expectations measuring how they see things develop in six months’ time
According to Lynn Franco, Director of Economic Indicators at The Conference Board the index shows a sharply higher consumer confidence in March 2017 since reaching its highest level in December 2000.
All Factors Point to Seller’s Market
Given the increased optimism and sentiment in the U.S. economy, likely based on the promises of tax cuts and reduced financial regulations by the new administration, lending standards appear to have softened. Combined with abundant liquidity in the market, this very well may set up 2017 as the year in which both, M&A activity and valuations rebound, despite being in an environment of increasing interest rates or credit costs. If you missed your window of opportunity in 2014 or 2015 to divest, you likely will find a favorable environment yet again in 2017.
With an advantageous market upon us, are you looking to sell your business? Let the investment bankers of Doeren Mayhew Capital Advisors help you navigate the market, find the right buyer and maximize your return on your way out. Contact us today.