M&A Timing - Industry Impact

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By Tom Zucker,
President

We can all recall a business owner who delayed putting his company for sale, and subsequently the “market” deteriorated.  That owner experiences disappointment and frustration knowing that he or she would have to wait for the next cycle for all conditions to be optimal again.  This time they are ready to because of age, health or changing market pressures. The unfortunate part of missing this current cycle is that another “best time” may not come around for another 5 to 10 years. 

So what makes a “market” cycle optimal and how does this impact an owners timing?  The market for Mergers and Acquisitions often refers to interest rates, capital gains rates, business buyer optimism, buyer demand for companies within a particular sector and the overall growth prospects of your business.  Many articles have been written about the impact of capital gain rates and interest rates have had on the M&A deal volume over the last several years.  The impact that industry cycles have on M&A deal pricing and M&A buying interest is often the untold story.

The timing of the sale of a business is certainly impacted by the overall industry outlook and buying demand.  Several recent examples of strong market interest driving excessive demand and high purchase prices:

Natural Gas/ “Fracking” Boom-  Over the last several years, strong demand has prompted high purchase multiples for water hauling, gas well services, well parts machining or virtually anything related to this market.

Internet / Telecom Boom-  In the late 1990’s, we experienced the height of escalated purchase multiples based on the prospects of the internet displacing all existing market players and creating a “new model” for doing business.

Real Estate/ Mortgage Boom-  The mid 1990’s produced a tremendous amount of growth in the real estate and mortgage markets.  Fortunes were made during this time of ample bank lending and loose credit standards.  Real estate in prime areas of Arizona and Florida were appreciating at rates that many had never seen.

As with all good things, cycles end and normalcy returns to the buying market.  We have met with many owners on the positive side of these discussions, as well as others who often lament not capitalizing on the selling opportunity.  Those that regret not selling will often indicate that they did not see the signs of the changing market.  In hindsight, we sigh that the signs were so obvious and clear.

As we begin to look for the next trends impacting our respective markets, we are constantly searching for the next big change.  One industry that screams of potential market volatility is the automotive manufacturing supplier marketplace.  Just a short while ago, banks were not interested in lending virtually anything to this market and the number of buyers interested in this market was limited.  Today, many consider the automotive market to be “hot” and an area that both banks and buyers desire.  The “Big 3” is certainly in better shape today than those bleak days of 2008.  The number of car builds has grown exponentially from those dark days.  Auto manufacturing suppliers are far fewer in numbers than prior to the government bailout of GM and Chrysler.  Automotive suppliers have grown and prospered over the last 5 years as a result of low interest rates, positive impact from the low number of car builds in 2008 through 2010, and reasonably respectful relationships within the automotive supplier “food chain”.  If you allow yourself to take a broader picture of this market and think through several scenarios of what the market might look like in 2016, the picture can get blurry and concerns can arise again. 

These trends reveal that the automotive supplier market may be at a pinnacle.  The low interest rates are expected by most to be rising in the near future.  Many meetings with suppliers indicate that certain of the Big 3 are trying to squeeze suppliers again.  International pressures are arising from new or strengthened competition within the automotive supplier base.  Of course, today it feels good.  The company is making money, the future is bright and all is good. 

Think about your industry.  How does it feel today? Draw on your experience and knowledge to project some likely scenarios for your business. Is it the right time to sell?

© Copyrighted by EdgePoint. Tom Zucker can be reached at 216-342-5858 or via email at tzucker@edgepoint.com.
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