M&A Market Outlook

By: John Waldock

For buyers and sellers of businesses, many factors impact the success of a transaction. For both sides, there may be transaction-related issues such as buyer and seller motives, cultural fit, and value added via synergies. Furthermore, these issues are often evaluated within the context of current market conditions, including the level of economic activity, availability of capital, tax laws and legislative/regulatory environments. While transaction-related issues are typically specific to each deal, market conditions affect nearly all transactions. This article evaluates current and forecasted market conditions through 2014 to develop an outlook on the U.S. merger and acquisition ("M&A") market.

Year in Review - 2013

When the results are tallied, the total M&A transaction volume is expected to be lower than prior year levels. At the beginning of 2013, deal activity was slow in both Q1 and Q2 due to record-breaking deal volume near the end of 2012 as dealmakers pushed to close transactions before tax rates increased in 2013. As a result, many buyers were still preoccupied with managing their latest acquisitions while active investors were left with a limited supply of high-quality, high-growth companies. During 3Q 2013, M&A activity rebounded as both strategic and financial buyers began refilling their pipelines. According to Thomson Reuters, middle market M&A transactions (<$500mm) in the Q3 2013 increased 17 percent over Q2. It is anticipated that further gains in deal activity will be reported for Q4 2013. Still, the recent spur in activity will not be enough to offset the year's slow start, and it is expected that the total deal volume will be lower than 2012.

Outlook for 2014

With deal activity gaining momentum in the last half of 2013, companies and investors are optimistic heading into the new year. An improving economy, favorable capital markets, and growing appetites from both strategic and financial buyers present compelling evidence for an active M&A market in 2014. 

Economic Conditions: As the housing market improves, consumer confidence builds, and capital spending rises, we will continue to see the domestic economy strengthen. Furthermore, concerns related to the fiscal cliff and changing tax laws appear to be behind us. As a result, companies and investors should be more comfortable pursuing a strategy of growth via acquisition.

Capital Markets: Strong capital markets will also help sustain growth in the overall M&A market. Some equity market participants are worried that the current bull market is aging fast and could soon end. However, the equity markets likely have room to expand, and credit financing remains relatively cheap and widely available. With the Fed announcing its intention to begin tapering its bond purchasing stimulus program in 2014, rates are expected to move modestly higher, but likely not enough to offset the improving market conditions and heightened optimism.

Strategic Buyers: Corporate cash reserves remain at or near record highs and many companies have considerable liquidity to pursue acquisitions. Non-financial members of the S&P 500 held an aggregate of over $1.2 trillion in cash reserves as of Q2 2013, according to Capital IQ. Companies looking to post growth rates beyond market levels will require M&A to achieve their corporate goals.

Financial Buyers: Financial buyers, such as private equity groups, are facing pressure to deploy vast sums of "dry powder" (unspent capital provided by investors) before investment periods expire. According to Pitchbook, financial buyers had $328 billion in dry powder as of Q2 2013. As a result, these buyers are actively looking to acquire new companies as both stand-alone investments, called platform acquisitions, and as add-on acquisitions that will complement current portfolio holdings.

The 2014 M&A market will likely experience a strong rebound from 2013 as conditions remain favorable to support future deal making. According to a recent survey conducted by Mergers & Acquisitions, 71 percent of respondents believe 2014 will be a better year for middle market M&A than 2013.

Questions?

Eide Bailly advisors are happy to answer questions about business transactions. Please contact us if we can be of assistance.