Firms vying to sell during the next decade should look to close the deal no later than 2014, capitalizing on a window of market stability already threatened by global tensions primed to ignite another dose of downturn. This is particularly apt for “middle-market” companies, or those garnering transactions between $5 million and $250 million.
I’m more optimistic about the acquisition market’s near-term prospects (2-3 years) than I was when I wrote about the topic last year. But I’m much more negative about the long-term and anticipate a severe and extended economic downturn sometime before the end of the decade; this will undoubtedly impact the U.S. and global acquisition and financial markets.
Owners need to stay savvy to market conditions and sell now or risk contending with market conditions and events beyond their control. The near-term outlook gives some advantages to company’s looking to sell:
Acquisition pricing is very strong now. I would anticipate it will remain this way through the end of 2013.
It is likely that there will be a second Obama Administration. But its significantly reducing the deficit will require more than spending cuts, as there are not enough spending cuts to make without harming the very structure and fabric of the U.S. It will also necessitate an increase in taxes. These revenue raising measures will primarily be focused on increasing the taxes on the wealthy, possibly significantly. One of the taxes almost certain to be increased is the capital gains tax. I expect it to be increased to at least 20%, if not 25%. If it is increased to 25%, your net after-tax sale proceeds have just been reduced by 10%. This is a sizeable hit.
Numerous private equity acquirers have a pressing need to invest capital promptly. Many of these funds received money from their investors in 2008 before the market crashed. That money basically sat idle for 2½ years. The private equity firms are now under tremendous pressure from their investors to get that money invested. This is driving these firms to invest that money quickly. For certain good companies they are willing to overpay if they have to, rather than risk losing the deal. This has produced some attractive selling opportunities.
U.S. corporations are flush with cash and have extremely strong balance sheets. This makes strategic acquirers very aggressive in the acquisition market and willing to pay strong multiples.
The stock market performance during the first two months of 2012 has been extremely good, contributing to an increasing level of optimism and buoyancy in the business community.
Interest rates are low and should remain low through the foreseeable future. I don’t anticipate the Federal Reserve deviating from its stated policy of keeping interest rates low until 2014. The majority of the Fed’s governors don’t feel it is worth the risk to implement a restrictive monetary policy, as they believe that it was a major factor in the Great Depression's depth and length.
But the news isn’t all good. Prevailing tensions will boost the risk of domestic, and probably global, investments during the second half of this decade, damaging the market value of U.S. firms. I expect a severe financial and economic downturn that will considerably exceed the Great Recession, and be much longer and worse than any we have endured in our lifetime.
Europe’s financial infrastructure is largely in disrepair, and that the problem is far from receding could impact major global financial institutions.
The U.S. faces a combination of social, political and economic concerns: a huge budget deficit, an economy in need of still more stimulus to self-sustain, widening income disparity, and political gridlock—all factors making economic recovery at once necessary and very difficult.
Emerging markets are no longer the reliable drivers of the global economy that they were in the past. China, India and Brazil, once burgeoning economic growth engines, are slowing down or refocusing in ways likely to impact developed markets.
Geopolitical hot spots, particularly in the Middle East region and North Korea, continue to threaten armed and potentially nuclear conflict among historical rivals.
What does this mean? The current period presents a window of opportunity to obtain a premium price. If this window is missed, there is a substantial long-term and likely long-lasting risk that the company’s value will be significantly reduced due to events beyond the seller’s control.
Spilka runs Spilka and Associates, an investment banking and acquisition consulting firm based in Pittsburgh. Contact him at firstname.lastname@example.org.