Symmetrical’s M&A Analysis – 2017 Review & 2018 Outlook

A cheerful attitude persists in the middle market M&A world. Despite a slightly down year in 2017, optimism remains high, and we expect a marked increase in activity in 2018.

Key Observations

1) Because median valuation/EBITDA multiples continue to steadily rise, while at the same time monetary policies remain beneficial for financing deals, now is a particularly beneficial time for business owners looking to sell.

2) Overall M&A activity is expected to rise this year; however, expected increases in interest rates by the Fed later in the year may dampen activity.

3) Due to the recent tax legislation, American companies are expected to bring hundreds of billions of dollars into the U.S. and take on significant capital investments and acquisitions.

Highlights of 2017 M&A Activity

Slight Cool Down

Last year was a cool down from the previous two years. While the total number of deals was down over 16 percent from 2016, the total value did not fall as much as expected.

Increase in Diligence

A notable trend in the second half of 2017 was a larger focus on diligence. A likely reason is that 46% of buyers who canceled or started renegotiation of deals in 2017 did so after discovering adverse information through diligence.

This focus on diligence increased the time needed to close a transaction. The average deal took 16 weeks to close in 2017, which was up from an average of 12 weeks in 2016.

Cash Hoarding

Many expected the massive piles of cash being accumulated by U.S. companies to be unleashed in 2017, but instead we saw companies grow their reserves. The total value of cash-on-hand by U.S. companies is in the trillions, and companies like Apple and Microsoft grabbed headlines in 2017 due to the staggering amounts they are holding.

Fourth Quarter Unease

The fourth quarter of 2017 saw the greatest slowdown in M&A activity. Uncertainty over the tax reform legislation that was making its way through Congress is an often-cited culprit.

It’s believed that many firms hurried to close deals earlier in the year when the bill’s details were still unknown.

Lack of Succession Planning

One particular detail from a recent Pitchbook survey is notable to those involved in sell-side M&A: More than a quarter of businesses either don’t have a succession plan or have an insufficient plan.

Not only could this have been a factor in the lengthening of the diligence period in 2017, but it could continue to cause delays on an individual transaction basis as baby boomers continue to retire at an increasing rate.

2018 M&A Outlook

Tax Reform Will Spur Investment

The recent tax reform law is expected to spur investment in the short- to medium-term for three primary reasons:

1) The decrease in the corporate tax rate from over 35% to 21% will greatly reduce most companies’ tax bill, further growing their cash-on-hand.

2) The law has a low, one-time transition tax rate to incentivize repatriation of off-shore cash. We’ve already started to see this feature take effect as large firms make headlines with their plans to repatriate hundreds of billions of dollars.

3) The bill allows full and immediate expensing of capital investments for five years, which will increase overall corporate investment activity.

Continued Economic Confidence

By most accounts, the economy is doing quite well in both the U.S. and globally, and it’s expected to continue that trajectory.

Investor confidence remains quite high despite equity markets being on a long-term growth streak, and overall consumer confidence rose more than expected in the first month of 2018.

The upward trend in confidence may be attributed to the fact that unemployment is currently at a near 17-year low, hovering in the low four percent range.

Cash to Be Deployed

Because of the combined catalysts of tax reform, ballooning cash reserves, continued economic confidence, and the prospect of increasing interest rates, it’s likely that companies will start to put their cash to work at a higher rate this year.

In 2017, we saw that growing cash reserves for strategic acquirers and growing fund sizes for financial sponsors did cause an increase in activity in the upper-middle-market. We expect this trend to continue.

Increased Valuations

In 2017, the median valuation/EBITDA multiple in U.S. M&A transactions were at 10.3x, up slightly from 2016. Multiples will only be pushed higher as M&A activity picks up.

Interest Rates Will Slowly Rise

Interest rates are still relatively low, making it easy to finance deals. However, the Fed has indicated that they will continue to raise rates later this year.

Conclusion

The outlook for 2018 can most aptly be described as optimistic. Last year was a decent year, but there are still large pools of money-chasing deals. Private equity groups have cash that they need to spend, and they are looking to spend it soon.

The combination of a growing economy, demand for acquisitions, and a good financing environment are pushing prices up. That makes 2018 a great time for those looking to sell.

We have more than 75 years of combined experience helping business owners successfully sell their businesses. If you’d like to confidentially discuss your options, please contact us.