With tax reform certainty and technology convergence being major themes in 2018, most analysts predicted even more M&A activity this year. To date, they have proven to be correct. According to Thomson-Reuters, as of May 31 U.S. deal volume is approximately $900 billion—the highest since 2006.
Numerous factors are driving volume. As already mentioned, technology convergence is a major factor. In 2013, non-tech companies acquired $13 billion worth of technology companies. In 2016, that number climbed to $128 billion. We may easily surpass that number this year as companies across every industry now recognize they are also technology companies.
Beyond technology convergence, the four big factors driving M&A volume in 2018 are:
Is now the time to sell?
Business is cyclical, and it is difficult to time when market conditions and business strategy intersect to maximize value and return. However, it is possible to make some broad assessments given the current environment.
For starters, valuations have risen as purchase multiples are above historical norms and buyers increasingly stretch to pay even more.
Also, employment gaps exist, but the labor market is very tight. The result is more companies will acquire to hire.
According to Ernst & Young LLP, 73 percent of surveyed executives of companies with more than $500 million in annual revenues plan to grow through M&A. Furthermore, 48 percent said they are willing to pay more to accelerate deal-making. Clearly, it is a seller’s market.
However, just because it is a seller’s market doesn’t mean you should sell. If you are a prospective seller, ask yourself: Is selling the company you’ve worked many years to grow the right decision for you? If so, have you maximized the value of your business? The following is a checklist of points you should consider:
You may want to establish an experienced board of directors that can help you address each of the issues above. Also, involve a team of professionals (accountant, attorney and investment banker) early in the process. Your team will help you put together an information book, review your company’s product set and organize three to five years of financials. These are all things prospective buyers will require.
Your investment banker should have deep expertise in a variety of industries and offer an expansive network of private equity firms and corporate relationships to deliver a full range of merger and acquisition options. Your banker can also help you with valuation and finding the right buyer.
Completing the sale
Mergers and acquisitions are an involved and lengthy process, and they are complicated by the fact that the valuation model can vary from deal to deal. But in most cases, price is typically set by the financial needs of the seller and the value the business holds for the buyer.
This is why it is important for both sides to work with dedicated mergers and acquisitions professionals. The seller and their team will put together a book of information, which is then distributed to a team of targeted buyers. Potential buyers will submit letters of interest. Then potential buyers complete their due diligence to ensure the acquisition is sound from a financial, strategic and cultural standpoint.
This strategy is a win-win scenario for all players: sellers meet their goals while minimizing tax consequences and buyers obtain a valuable and strategic asset. Currently, the M&A market is hot and the conditions are favorable for both.
James Barger is president of KeyBank’s Rochester Market. He may be reached by phone at (585) 238-4121 or email at [email protected].o