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Various Reasons for Rise in Mergers, Acquisitions Guest column by Scott Bushkie, CBI, M&AMI SOURCE: GREEN BAY PRESS-GAZZETTE, FEBRUARY 13, 2005 When everything is normal, an average number of business owners are expected to sell every year because of retirement, burn out or other causes. However, due to the Sept. 11 tragedies, corporate scandals and the economic recession, many people chose to hold their company until economic conditions became more positive. Now that the economy is rebounding, the market is experiencing an uptick in mergers and acquisitions (M&A) activity. Several indicators suggest that trend should continue to grow in 2005. Here are six reasons why M&A activity is growing stronger: 1. Interest rates are low, but rising. Rates are expected to rise at least 25 basis points each time the fed meets this year. As interest rates rise, more cash flow is allocated to interest rather than principal. That means the purchase price has to be lowered to create a reasonable debt service ratio. Sellers who enter the market before rates increase have a better chance of receiving a higher purchase price for their company because buyers can simply afford to pay more. 2. President Bush’s tax cuts remain in place for 2005. Under his economic recovery plan, capital gains taxes were reduced from 20 percent to 15 percent. The math here is simple: On a $10 million sale (provided 100 percent of the sale price is allocated toward capital gains), that 5 percent tax break means a $500,000 savings for the seller. These tax cuts were initially approved through 2007. With the President’s reelection, indications are good that tax cuts will remain in place until then. Who knows what will happen after that. 3. We’re now more than three years past the Sept. 11 terrorist attacks. Just like the old adage that says time heals all wounds, that tragedy is having less effect on buyer confidence than it did in the past. The economy as a whole is recovering from those low times. 4. Baby boomers are between 40 and 58 years old. Many boomers in the lower half of this group are in acquisition mode, creating a huge market of buyers right now. As the baby boomers start to retire they will be placing more businesses on the market, eventually creating a market saturation. Sellers who are acting now to get in ahead of the curve are capitalizing on supply and demand advantages. 5. Many companies today are much more financially healthy than they were a few years ago. From the buy-side, this means existing business owners have money to invest in acquisitions. From the sell-side, it means sellers are showing stronger cash flows that will drive up the price of their businesses. 6. Investment capital is extremely high. During the economic downturn, managers were focused on maintaining returns. Now that the economy is rebounding, corporate buyers and private equity groups are focused on growth again. Most investors sat on available capital from 2001 to 2003. According to an article in the January edition of “CapitalEyes,” a Bank of In a risky economy, investors want more of a slam dunk. Lower confidence equals a lower purchase price. Today, buyer confidence is growing. As it builds, investors are willing to share in larger risks. Historically, multiples have risen as confidence increases. Compounding that, many businesses are in a better financial position than they were three years ago. These two factors combined will get sellers a higher purchase price, especially when the amount of sellers on the market is low. The economic environment is healthy, taxes and interest rates remain favorable, and confidence is rebounding. Investors and sellers are making up for lost time. As long as conditions remain favorable, M&A activity should continue on pace. All things considered, if your business is in good financial condition, now is a good time to sell. «Back |
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