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Advisors, Private Equity

2016 M&A Predictions Revisited (Part 1)

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Back in January, we asked Axial members for their predictions for M&A in 2016.

Halfway through the year, we’re looking back on past predictions, and taking stock of what’s in store for the next six months.

“So far, 2016’s been a bit uneven, especially compared to a gangbusters 2015, but it will still likely end up being the second-best M&A year since the Great Recession, including in the mid-market,” says Ami Kassar, founder and CEO of MultiFunding.

Says Brent Beshore, founder and CEO of adventur.es, “On the lower end, the market seems strong. Business owners who survived 2008-2010 have been rebuilding their companies at different rates and those continue to enter the marketplace. They’ve been through hell and back, and would prefer not to do it again. Combine that with the baby boomer generation dynamics and it’s hard to see how supply doesn’t increase consistently over the next ten years.”

Here are a few members’ thoughts on the state of M&A today.

1) “Cheap money is plentiful.”

“Cheap money is plentiful,” says Beshore. “Well-collateralized five-year fixed senior debt is in the mid-3s with good terms, while non-recourse senior debt is around 6%. It will be interesting to see how the Fed rate decisions make an impact. I wouldn’t be surprised to see debt cost actually decrease over the next year as the US follows world trends. While I’m not concerned with true deflation, the pull is certainly towards that end of the spectrum.”

Kassar agrees. “Perhaps the most important thing that will spur M&A is that (apologies to Drew Carey and Bob Barker) the price is right.” Before the Brexit vote, “Federal Reserve Chairwoman Janet L. Yellen told Congress that weak domestic growth, the possibility of Great Britain departing from the European Union, and other global risks may force the Fed to forgo interest rate hikes. That means interest rates near historic lows will remain in effect. And cheap money means deals are to be had — simple as that.”

Even if the interest rates ticks up, says Robert Flynn, Managing Member of United Brokers Group, LLC, “slightly higher rates will not substantially change the 2016 mid-market deal environment. Rates are still very low by historical levels and asking prices will reflect a higher rate environment looming in the next few years. So rate increases will be priced into closing prices by smart sellers.”

2) “There’s plenty of capital for deal-making.”

“In addition, there seems to be plenty of capital available for deal making,” says Kassar. “Aside from banks, it looks as if traditional asset managers, not to mention business development companies and private equity providers, are showing signs of increased activity. Meantime, the equity market volatility and debt market turmoil seen earlier this year seem to be largely tamed, which is a good sign.”

3) “If companies can’t grow organically, odds are they will turn to M&A.”

“Another sign that points to a healthy M&A market is generally slowing economic growth worldwide,” says Kassar. “If companies can’t grow organically, odds are they will turn to M&A as a more efficient way to grow. Considering the growing number of activist investors putting pressure on boards, M&A will be an increasingly palatable corporate option.”

4) “There’s no stopping China.”

“While China is showing growing pains, that’s not stopping its companies from making deals. There were $26.8 billion in acquisitions by Chinese companies through May 31, according to Dealogic. That’s a 68 percent increase from a year ago,” says Kassar.

Still, regime uncertainty may affect investments. As Stephen Lewis, managing director of Headwaters MB, noted in a recent article, “The Chinese government has recently attempted to impose restrictions on the ability to expatriate cash in an effort to prop up the economy,” says Lewis. “It has become even more difficult than before to construct deals on the Chinese mainland through a combination of bureaucratic red tape, lack of consistent transparency in the legal system, and the difficulty of getting debt financing.”

5) “Oil & gas is hot for obvious reasons.”

As for sector-specific predictions, Flynn says “manufacturing and light technology mid-market deals remain near the top of the list for many of our buyers.” He predicts the staffing industry will slow a bit, and also foresees consolidation in daycares “due to job creation (mom and dad back to work) and tightening of various state regulations to control quality of new owners.”

Predicts Kassar, “As usual, the technology, healthcare, and life sciences sector will be in play. They could be joined by the power, utilities, and oil and gas sectors.”

Beshore agrees that oil and gas “is hot for obvious reasons,” and says “aerospace seems pretty frothy as well.”

6) “I don’t believe the presidential office can dramatically impact the economy.”

According to Heather La Freniere, EVP and Head of Originations at Gibraltar Business Capital, there “has been a slowdown in activity due to [political] uncertainty as well as the anti-business climate from both candidates. Companies don’t want to invest long-term right now, so they are just watching — and watching doesn’t require capital.”

Says Flynn, “My general assessment of the potential election impact from my clients’ comments is that Clinton will prevail in November which in the near term may hurt mid market deals, and equity markets may tumble. However, a potentially smart pro entrepreneur Clinton Cabinet may introduce programs to benefit the mid market.”

Beshore has an optimistic take. “We’re blessed to have a resilient system of government that splits powers between branches. I’m not excited with either viable candidate, but I also don’t believe the office can dramatically impact the economy. With that said, I certainly would be worried if I was running/owning a large corporation and wouldn’t be surprised to see some arbitrary sanctions against some very prominent companies.”

Says Kassar, “Political uncertainty is a wild card with an unknown potential impact. Obviously, that will be in play until early November.”

Read Part 2 here

Have other predictions? Email editor@axial.net to share your thoughts.

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