Anxiety & optimism
The Colorado mergers and acquisitions market was mocked, rocked, socked and shocked right out of its jockstrap in 2007-2008. If financial markets had a heart it would have stopped then.
But by 2009, M&As were turning back up again. Not up to the deal numbers of the bubbly mid-2000s, but nationwide steadily turning out about 2,500 transactions per quarter, and roughly 90 to 109 in Colorado.
The funny thing is that both conditions linger in M&A markets today: anxiety and optimism, cheer and foreboding. Like that.
The mergers and acquisition market is like sitting down to a big Italian meal – an aperitif, followed by antipasto, polenta, broccoli, salad, lasagna, fruit and cheese, dessert – but you already have heartburn.
The good news is – if you are a business owner reading this – it is a seller’s market and multiples for solid businesses are high.
"Volume is significantly up; it really started to pick up in 2010 or late 2009 as banks started more aggressively lending, and that’s been driving a lot of my practice," says Nate Ford, Denver-based partner in the Perkins Coie law firm. "Capital is plentiful and cheap right now and so there’s money available to pay higher prices."
Companies that survived the downturn, or maybe even started after the downturn, "have done quite well," says Ford. "You have a lot of really good companies that are being sold at high multiples; you also have a lot of capital to spend."
Plus, Fortune 500 companies have roughly a ton of cash on their balance sheets – still – for acquisition capital, and despite a slack third quarter for them, "many of the private equity funds that were raised just before the crash had a few years there where there just weren’t that many investments to be had, and now they’re feeling the pressure to invest the capital that they have been sitting on," Ford says.
"However, there’s still business risk," Ford notes, as well as lots of other kinds of risk.
"We have come out of the economic recession to the point where there is more stability," says Doug Wright, partner in the law firm of Faegre Baker Daniels in Denver. "The economy is stronger but it isn’t sufficiently stable for various reasons for the M&A market to come roaring back."
And that in a nutshell seems to be the problem with 2012. It has been a good year, for some even a great year, but 2012 still didn’t live up to expectations. So it’s a little bit of a downer.
"The M&A markets crave certainty, and there has remained throughout this year a significant amount of uncertainty continuing about the economy, about taxes, about the fiscal cliff, politics, Europe," Wright says.
"Buyers have not found that level of certainty that allows them to say it is time to open our pocketbook and go on a buying binge," Wright observes.
"The lack of excitement around the M&A activity this year is a result of the various kinds of uncertainty," he says. "There is a foot on the pedal and a foot on the brake."
Neither does Ned Minor foresee any powerful bursts of M&A activity on the way.
"No one is predicting another spike, another bubble," says Minor, president of Denver-based business law firm Minor & Brown. "They are projecting some sort of dip – not as bad as we went through, certainly – but starting late 2013 or early 2014 a dip carrying on through the first half of 2015," he says. "So there’s no easy ride here."
Business owners are selling solid businesses for high multiplies because they are good deals and also because entrepreneurs "are tired, they are beat up, they have borne the brunt of this recession," Minor adds.
"These baby boomers are now four years older than they were four years ago," he adds. "They see a positive trend in the market, and some of them say, ‘This is an opportunity now; right now is the right window of opportunity to take my chips off the table.’"
Adam Agron, co-chair of Brownstein Hyatt Farber Schreck’s corporate and business department, in the main agrees with this sweet-and-sour description.
"It has been a recovery but a very slow recovery, certainly on a steady incline, but it hasn’t been rapid," he says.
Firm deal flow is "almost back to where we were, not quite there but getting there. The big difference now is that getting M&A deals done takes a lot longer and it’s a lot harder," which actually can be good for the law firm but less often is a plus for buyers or sellers.
As far as legal firms are concerned, Agron says, "This is an opportunity for the good ones to shine, and the ones that just market and try to get deals done as quickly as they can won’t have that same success, because it’s just not as easy anymore."
Speaking of not easy anymore, "Federal regulation is one very big theme today. The regulatory piece is one of the important changes from the 1990s and early 2000s. The government now is so much more present in private industry," Agron says.
In Chicago this week Agron says he was working on an acquisition by a private equity firm from a Fortune 100 company. "We came across a roadblock on a regulatory issue, and someone at the table said, ‘It’s amazing that business does business in this country anymore. We’re trying to buy a company; they’re trying to sell a company. Everyone is on the same page in terms of evaluation. It’s going to be great for the company, great for the employees; it is great for everybody.’
"Now we have come across this hurdle, and we’ve got to get a notice and approval and wait 60 days, and it’s just baffling to many people," says Agron. "It makes it so much more difficult to do business in this country right now."
Warren Henson is president and senior managing director of Green Manning & Bunch, a middle-market investment bank with offices in Denver and Phoenix. The company focuses on four industry sectors including health care.
As you know, health-care rules and regulations of late have caused some consternation and confusion.
Yet, "We are still doing health-care deals. We closed a health-care IT deal last year and we’re working on two health-care IT deals now. It’s pretty remarkable how many deals we’re trying to close by the end of the year. We will see which ones get done."
M&A market volume has been pretty good, but Henson reckons it could be better.
"There is still really good activity but there would be even better activity if some of the uncertainties were removed, and you can’t remove all of them," he concedes.
Hendrik Jordaan, chairman of private equity investments and buyouts for the Morrison Foerster law firm, also touches on the uncertainties.
"The M&A markets are thirsting for certainty, struggling with this uncertainty particularly in regulated industries," he says.
Did we remember to say it’s a seller’s market?
"Good companies are going for very healthy multiples," says Jordaan.
That also means due diligence more rigorous than a colonoscopy.
"When you pay full-tilt, full price for a company, buyers are going to want to be very careful," he notes.
From the viewpoint of the seller of said solid business, "thorough and complete due diligence has not changed," Jordaan says.
He cautions that businesses that have not been vetted should not go to market. That could be a terrible mistake.
"We’re seeing a lot of busted deals, where private equity funds are signing letters of intent hoping to get a deal across the goal line," he adds. "But once they peeled back the onion and discovered due diligence concerns, well, there’s then a lot more conversation about value and more broken deals as a result."
But if and when appropriate, do bring your solid Colorado business, big or small, to market.
"It is a very solid market. The best businesses have come through the recession, their balance sheets are clean. Their operations are lean and efficient, and they are looking for opportunity," says Andy Limes, principal at Denver-based investment banker SDR Ventures.
"Because of the fact that the buyers are now out of the closet and because of the private equity overhang, it is a really good time for a solid small- to medium-size company to sell."
Have we mentioned the importance today of "solid companies"?
"Solid denotes strength, not going anywhere, not shaken very easily," says Limes. "A solid, mature, profitable company, growing even slightly, has got significant value right now."