Don't look back
For mergers and acquisitions professionals, fourth quarter 2012 might seem like a lifetime ago. That was when buyers and sellers of companies rushed to finalize deals before Jan. 1, 2013, when the Bush tax cuts for capital gains were set to expire. According to private equity and venture capital research firm PitchBook, fourth quarter 2012 set a record for the middle market ($25 million to $1 billion) with 413 deals nationwide. The number dropped to 225 in the first quarter of 2013.
In Colorado, industry experts say there will be no such frenzy this year-end.
“I don’t think activity is going to be as robust in fourth quarter 2013 as it was in 2012,” says Warren Henson, president and senior managing director for the investment banking firm Green Manning & Bunch Ltd. “We are going to see deals that, if they are not done by the end of 2013, they may go into 2014. There is not as much of a driver to finish them as there was last year.”
The pace has slowed for another reason as well. Henson says he is seeing much more emphasis on due diligence these days. Deals that used to take six to nine months to close can now take nine to 12 months, as some buyers have become risk averse.
Activity remains quiet, according to Nate Ford, a partner in the private equity merger and acquisition practice at the Perkins Coie law firm. “It’s counterintuitive because borrowing costs are low, but people are pulling the trigger only if it’s an absolutely great deal,” he says. “There is a lot of competition for those good deals. We are shocked at the multiples people are bidding.”
According to PitchBook, in the first half of 2013 valuations for middle-market deals hit a decade high of 10.5 times EBITDA. In 2012 it was eight times EBITDA.
Ford adds that some industries, such as health care, are especially strong. With the Affordable Care Act going into effect in phases, companies that create efficiencies or better outcomes are getting attention.
Oil and gas is also drawing notice. According to PricewaterhouseCoopers' Oil & Gas M&A analysis, in the first three quarters of 2013 the Rocky Mountain region saw 21 deals for a total of $11.9 billion. That is down slightly compared to the first three quarters of 2012, which saw 23 deals for $12.9 billion. PwC’s quarterly report, which tracks deals valued at more than $50 million, also noted that third quarter 2013 had five deals for a total of $2.2 billion, down from 11 deals for $7.5 billion in the second quarter of this year.
That drop-off is normal, says Rowena Cipriano-Reyes, a Denver-based partner with PwC’s energy practice. “Quarter after quarter it has been seesawing,” she says. “Companies continue to look at their portfolios and they are divesting assets that are not aligned with their strategic objectives.”
The oil and gas deals for the region totaled $22.8 billion in 2012, a figure that will likely not be matched this year. Still, Cipriano-Reyes says, these two years have been strong. The overall deal value in 2011 totaled $12.4 billion. “We are almost even with 2011 in just three quarters in 2013,” she says. “I think it’s exciting for Colorado, given two years in a row of seeing this level of activity.”
Dominic Lloyd, a partner in the law firm BakerHostetler’s business group, says there is a reason for this much activity in oil and gas. “There is a lot of opportunity, there is money and there is interest,” Lloyd says. The industry also has another feature in its favor. “One of the drivers of getting deals done is there has to be agreement between the buyer and seller on price, and where people see the future going. There may be more consensus in the oil and gas industry now, as things are going well.”
Agreement on valuation is an issue with smaller deals, too. That’s an age-old challenge, says Boris Katsnelson, managing partner of private equity fund Mountain Ridge Capital. “For sellers it’s their baby, especially if the company has been there 30 years. The seller thinks it’s worth $20 million, and from an unbiased person’s view it’s worth $10 million.”
Katsnelson, who also chairs the Rocky Mountain Corporate Growth Conference, the Denver event for the Association for Corporate Growth (ACG), says many sellers today are baby boomers ready to retire. They might come up with a sale price based on something they heard or read, or on the price of the retirement property they wish to buy from the proceeds of the business sale.
There is not always a gap, though. According to BizBuySell, an online marketplace that collects data from business brokers, in the Denver-Aurora market in third quarter 2013, the sale price of small businesses it tracked was 96 percent of the asking price. “That’s pretty tight,” says Curtis Kroeker, group general manager for BizBuySell. “The national average is 91 percent.”
Lloyd thinks M&A activity will pick up soon. “There is a lot of money in the system,” he says. “Private equity is raising gobs of money, and they have to do something with it.”