After several strong years, the mergers and acquisitions (M&A) market stumbled a bit in the last few months of 2018. According to early reports, the number of middle market M&A transactions completed in the U.S. declined by as much as a third in the fourth quarter of 2018.
The data beg the question: Is this the beginning of the end for a strong M&A market, or simply a pause in the action? We believe that it is merely a pause in the action. In fact, we’re approaching M&A in 2019 with a sense of “guarded optimism.”
Conditions Have Changed, But Still Are Favorable
Despite some minor shifts, underlying economic conditions remain very favorable for M&A. The economy is still humming along with the unemployment rate under four percent. Even though some public companies have revised their 2019 earnings guidance downward, fundamental business operating performance and growth remain strong overall.
Interest rates have gone up a bit but debt financing for deals remains cheap by historical standards, and is readily available. Both private equity and strategic buyers are flush with cash and are actively seeking quality companies to buy.
Sellers Should Sell Now
This is a great time to be a seller and a tough time to be a buyer. One reason for this is that M&A valuation multiples remain sky-high. We believe those sky-high valuations are reflecting an environment where too much money is chasing too few deals.
Another reason why the current M&A market is good for sellers is that contract terms are heavily favoring them. The emergence of more “public company” style deals that involve little or no recourse against sellers after the closing, as well as the increasing use of insurance policies to cover post-closing claims that could otherwise arise speaks to this trend.
For potential sellers, now is the time to sell, and you delay at your peril. Corrections are a natural part of a cyclical business like M&A and this nice run won’t last forever. Conditions will get worse from here at some point, but it’s doubtful they will get better.
On the flip side, buyers should proceed with extreme caution in the current environment. It would be easy to make a mistake given the hefty valuations, short deadlines and eroding contractual protections in the seller-friendly market. Be patient – and careful.
It’ll Come Down to Confidence
The most important factor for the 2019 M&A market is confidence. If business leaders and owners can regain their confidence, 2019 could be a very strong year for M&A.International trade spats, recent stock market gyrations and the political uncertainty that comes with partisan bickering, brewing scandals and the government shutdown, have spooked business leaders. But if those business leaders get an opportunity to clear away the brush and focus on the solid underlying fundamentals, M&A will regain its footing and 2019 will be another very good year.