Recently Robert W. Baird & Co. released its annual projections for worldwide M&A activity in 2011. Since many middle-market business owners are under the mistaken impression that M&A activity is still down, I thought I would share a few comments from its overview so you can see that the consensus is growing that M&A activity should be strong in 2011 and beyond.
As we stated in a posting last week, most analysts expect 2011 to see a solid turnaround in M&A activity.
This is how Baird summarized 2010:
“The momentum in the M&A markets accelerated in the second half of 2010, which featured significant growth in announced dollar volume. The entire year was highlighted by stand-out performance in the U.S., where growth in deal count and dollar volume exceeded 50% (over prior year). Indeed, the U.S. middle market experienced the highest full-year transaction total since the internet bubble of 2000, as strategic buyers favored bolt-on in a low-growth while sponsors’ sell-side activity surged, driven by robust credit markets and a fear of tax changes in 2011 (which did not materialize). Many key M&A variables remain positive as 2011 begins. If the economy and credit markets cooperate, it will be full steam ahead for a strong year for M&A in 2011.”
As we stated last week, Generational Equity experienced the M&A market rebound as well in 2010. As the year progressed, we saw more and more interest for our deals from all buyer groups. We expect more of the same in 2011. So does Baird.
To quote them again:
“M&A activity in 2011 should build on last year’s recovery due to momentum in deal-making through the end of 2010 as well as the positive outlook for the primary deal drivers. A recent survey of M&A professionals indicated expectations of moderate growth in M&A activity in 2011. Dollar volumes in 2011 could be consistent with levels achieved in 2005, the second year of the previous M&A recovery, while remaining below peak historical values. Based on robust trends in the middle market, particularly in the U.S., the 2011 deal count has the opportunity to surpass the record high of 2007.”
Baird went on to identify four “primary” drivers of M&A growth in 2011. Here are some highlights of each:
1. Strategics Will Be Active – The pieces are in place for a busy 2011 among strategic acquirers. Corporate balance sheets are flush with cash (nearly $2 trillion for U.S. companies). The economic recovery has restored cautious optimism among executives, bringing M&A to the top of agendas in corporate boardrooms.
The heart of M&A activity is likely to continue to happen squarely in the middle market, with large corporate buyers placing smaller, strategic bets instead of “betting the ranch” with large transactions.
2. Equity Firms Will Be Active Too – For financial sponsors, conditions should be near perfect in 2011 for buying and selling assets. As buyers, sponsors are focused on deploying the large amounts of committed capital (estimated at well above $400 billion) by securing new platforms or add-on businesses (a platform is the initial investment that an equity firm makes in an industry, additional acquisitions in that industry are then “added-on” to the platform company).
3. The Economy Should Help – Economic forecasts for developed markets call for 2011 GDP expansion in the lower single digits, which should tilt “buy versus build” decisions toward M&A.
4. Credit Markets are the Key Swing Factor – Baird expects credit conditions to represent a critical wildcard for M&A in 2011. While private equity shops and corporate acquirers are currently set to take advantage of favorable financing markets in completing transactions, persistent sovereign debt woes and signs of possible overheating in the high yield and leveraged loan markets could represent an impediment for M&A financing activity.
We concur with Baird’s overall analysis of the current state of the M&A market. Last year laid the foundation for the next M&A recovery cycle. Now with renewed confidence in the economy and the sheer size of the capital that both strategics and private equity firms are sitting on, all the variables are lining up indicating a solid year of growth is ahead.
Historically M&A recovery cycles last three to four years. And each recovery cycle eclipses the last in terms of dollar and deal volume. This recovery should follow suit. This means that if you own a middle-market business, you really should begin to examine yourplanning options. The environment for finding buyers and closing optimal deals could be the best we have seen in years over the next 12 to 36 months.
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