M&A Activity in 2016 – The Buyer’s Perspective

By Generational Equity


After a record-setting 2015 in terms of M&A activity in the U.S., the million-dollar question is what will 2016 end up looking like? So far this year, even though the stock market in January did affect investors’ outlooks on M&A investing, and although 2016 may not be a record year, it is shaping up, at least for Generational Equity, to be another stellar year. In fact, we have nearly the same number of dual signed letters of intent right now than we did at the same point last year (a dual signed LOI is a good indication that the deal will close).

But what about the bigger picture? How about M&A activity in the country as a whole?

A few months ago, The M&A Advisor held a roundtable discussion entitled, “Investors Outlook for 2016.” The focus was on M&A investor activity in the middle and lower middle-market, which Generational Equity loosely defines as being transactions valued below $150 million. I recently downloaded a copy of the discussions between the moderator and the participants, and a couple of the queries and the panelist’s replies were quite interesting.

The panel consisted of the following leading M&A leaders:

  • Corey Massella – New York Office Leader, Katz, Sapper & Miller (Moderator)
  • Savio Tung – Chief Investment Officer, Investcorp
  • John K. Castle – Founder and Chairman, Castle Harlan
  • Jennifer St. Pierre – Vice President, Corporate Development, EMC
  • Bob Morse – Co-Founder & CEO, Strattam Capital

As you can see, this group was comprised of a good cross section of participants representing consultants, PE firms, as well as strategics. So their input could be seen as reflective of how professional buyers view the M&A horizon for this year.

As mentioned, a couple of questions that moderator Corey Massella raised and the conversations that ensued, were informative as they relate to M&A activity this year. Here was the first query:

The Average Size Transaction Was Down in 2015 – Trend or Not?

Savio Tung “noted that roll-up strategies were more prevalent in 2015. ‘Sponsors are all doing roll-ups, so they don’t mind buying a company and paying maybe a higher price, but then they will focus on adding tuck-ins and suggesting combinations. That I think is a trend that will continue.’”

This is definitely a trend we have seen growing for the past several years. As we have discussed before, add-on acquisitions (a.k.a., roll-ups or bolt-ons) as a percentage of all PE transactions have grown substantially over the past 5-6 years. By definition, an add-on is a smaller transaction that is made because of a strategic fit with a platform acquisition (which can be quite large). These are now quite common as investors have learned that with tepid economic growth, the fastest, most profitable way to grow is via acquisitions.

A second interesting question and responses:

Where Will M&A Activity Be Centered in 2016?

“Tung said he predicts that 2016 will be pretty good for middle-market private equity. ‘I think we do have to be careful to pull the trigger, because prices will be high and the margin of error is very thin. I see pretty good deal flow in the community.’

As far as predicting for 2016, St. Pierre said EMC will continue with its dual investment strategy of investing organically in R&D and inorganically through M&A. ‘In terms of what 2016 brings, that comes down to quality candidates in the market and it comes down to valuations.’”

The replies to this inquiry are quite telling, and I have taken the liberty of bolding segments for emphasis. First, despite seeing higher prices, Tung predicts that deal flow will be good for the PE investor. This means that there will be opportunities out there for the savvy buyer who is looking for specific targets.

Ms. St. Pierre says essentially the same thing, indicating the EMC will continue to remain acquisitive looking for two things: quality candidates AND reasonable value expectations on the part of sellers.

The Importance of Value Realism

Quality of candidate and valuation hopes are two sides of the same coin. An investor is always looking to make an investment in quality targets; however, as we have reported before, one of the major issues so far this year is that sellers, knowing that we are in the third year of a seller’s market, have valuation expectations that may be far above the market.

This has happened with every seller’s market and will remain so until supply begins to match demand. Right now we have too much demand chasing too few quality deals. This tends, as we have seen many times, to raise the value expectations of sellers in general.

This is why it is so vital for business owners to engage in the services of a professional M&A firm PRIOR to going to market. At Generational Equity we believe we have a responsibility to our clients to complete a thorough evaluation of their business (which includes an estimate of the business enterprise value) before engaging the market.

Why? Because of two reasons: It gives the business owner an idea of what offers to take AND it provides him/her with a realistic value to expect from buyers. It is the latter outcome that is most appealing to buyers that approach us. They know that our sellers are truly committed and have a realistic value in mind for their companies. This is so important in a seller’s market. Trust me, professional buyers will quickly walk away from any valuation expectation that they cannot justify via their financial modeling, no matter how fantastic the company is.

In summary, as a business owner reading this blog today, you have a couple of key takeaways. First, 2016 should be another solid year for sellers of well run, profitable businesses who have realistic valuation expectations. And the second is this: Hire a professional to represent you to buyers like these on this panel. It is those types of buyers that you want in your pool. The only way to truly get in front of them is to have a qualified M&A firm in your corner. Chances are good that they aren’t going to be knocking on your door.

Special thanks to The M&A Advisor for hosting this panel discussion.

Carl Doerksen is the Director of Corporate Development at Generational Equity.

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