RBS Citizens and Forbes Insights recently produced a new survey entitled Middle Market M&A Outlook 2012. They surveyed the business buyer market for M&A activity. If you are the CEO of a growing business with even an inkling to exit your business in the near future, take note of these findings.
Combining a survey of 432 senior executives with 11 in-depth interviews from companies that ranged in size from $5-500M (45% under $25m); they found that
“most mid-size companies said they had ample cash, while two-thirds viewed
today’s conditions as a “buyer’s market.” To this, add the fact that asset prices
are at or near historical lows.”
Their insights and commentary from middle market buyers are equally useful to exiting CEOs being that you are the prospective sellers into this market. Consider each of these Key Findings and how they apply to your situation:
“Key signals indicate that markets could be ripe for M&A. Two out of three middle market executives view conditions today as a buyer’s market. Meanwhile, two-thirds of the survey respondents also said that balance sheet cash was plentiful—with over a third indicating that they could acquire assets of $2 million or more without incurring debt or injecting equity.
But other signals are mixed. Deal volume is often driven by market participants’ view of future asset values. Only about a third of executives said they believed prices would be higher one year hence. However, among the most active acquirers in the survey sample, that expectation rose to one-half.
For now, organic growth is the preferred path. More of today’s mid-size companies are focusing on achieving growth through wholly internal means than by any of the corporate development approaches involving mergers, acquisitions, partnerships, or other close collaboration with external counterparties.
But companies are very much open to M&A. M&A is recognized as a source of potentially significant growth. Half of all executives described themselves as active in M&A, with one out of eight describing themselves as very active.
There will be deals. One in three executives said they were likely or very likely to acquire one or more significant assets over the course of the next year.
Most express a merely opportunistic approach. About one in four executives described their current orientation toward transaction markets as proactive. Their companies are poring over balance sheets and income statements, looking for viable external targets or even potential internal divestitures. Well over half said [that] though not actively seeking a transaction, [they] would be willing to act should a compelling proposition arise.
Synergy, though challenging to achieve, still drives valuations. Synergy, the idea that one plus one can equal an amount greater than two, is often invoked within a deal premise. Synergies come in two basic forms: cost and revenue. While both can be difficult to achieve, and both are often overestimated; it is the latter category that sophisticated acquirers say should be treated with particular skepticism. In any case, two out of three executives said that synergies were a vital component of valuation.
Executives perceive a range of integration challenges. One reason that executives tend to prefer organic growth is that bringing an acquisition online requires considerable focus and resources. Survey participants noted that a number of areas are, at best, difficult to integrate. The areas of greatest concern include IT, sales and marketing, product development, and manufacturing.
Deal practitioners are using a wide range of tools. In performing valuations, executives use multiple lenses. Tools include everything from discounted cash flow models to comparisons of comparable transactions, public company valuations, payback periods, and even real option and multi-variable simulations.
Consultants matter. Faced with the challenges of assessing opportunities, performing valuation, or financing a deal, executives recognized the need for a mix of both in-house and external resources. For the most active, valuation, financing, and due diligence are the areas where specialists are most often tapped.
We’re not for sale. Three out of five executives bluntly stated their companies were not for sale. Still, the remaining two out of five said they were willing to entertain the idea of being acquired. Only a tiny fraction of survey participants described themselves as anxious. And a note to any would-be sellers: the vast majority of executives viewed carve-out financial statements as at least somewhat or very important. Or put another way, the preparation of reliable carve-out statements can help to ensure a quicker transaction.”
Reread these key findings in the context of your business and you being the seller being targeted. How can you use these insights to strengthen your own company’s position?
Kerri Salls
Exit Strategist
P.S. To avoid potential pitfalls that could potentially derail your exit transaction, plans and strategies leading up to and following that event need to be in place well before the deal is done. Please contact our office if you would like to discuss your objectives and timeline in confidence.
