At Douglas Group, we have had an enormous number of inquiries lately about what impact the recent crazy ride in international stock market volatility is having on buy/sell or merger/acquisition activities. Actually, there is both good news and bad.
The bad news is that for the publicly traded corporate buyer, there's a bit of insecurity right now for the large acquisition transaction. It is increasingly difficult for the large industrial entity to predict what its cost of capital, or access to debt will be, in these volatile times. For the contemplated "stretch" acquisition - one that is fairly major relative to the size of the acquirer - such acquisition activities may appear too risky. No one likes to incur the hundreds of thousands of dollars required to complete due diligence on a large transaction, with the risk that underlying debt financing may collapse at the last minute, or that a public market may perceive them as taking excessive risks to acquire at a high price, in these turbulent times.
The bad news, however, probably doesn't apply if the acquired entity is far smaller than the buyer. In that instance, outside debt is really not a stumbling block, due to the relatively minor size. And the likely PR "spin" can be very positive as a sign of continued strength and forward momentum.
Generally there is also good news in the impact that such market volatility may have regarding desirability of direct middle market operating company investments. There remains a truly vast amount of baby-boomer capital out there, seeking safe but growing venues for investment. Many buyers in this cycle of wild market volatility actually feel even safer investing in a real operating company today, than they would in public markets.
Equity funds continue to thrive and to have significant capital to invest. They are actually more competitive than ever in pricing to win deals. This is not to say, however, that they are not affected by the availability of credit to finance transactions, and to finance subsequent growth needs. Credit is accessible, but debt-to-equity relationships are being carefully watched, and such scrutiny puts a healthy counter-constraint on marketplace competition for pricing. The good news for sellers, however, is that such buyers are plentiful, and multiple contenders encourage strong competitive markets.
Also, the business world continues to become ever more international. Buyers today invariably come from all over the world. Actually, the under-valued dollar of recent times has allowed international contenders to pay more than they could have years ago. Plus, as world economies develop in other nations, some of the expertise that has been long-established in the US, is becoming increasingly desirable for sales of both consumer and industrial product abroad. (For example, we recently have had LOTS of international buyers seeking U.S. automotive aftermarket producers. China has 10 times the number of cars they had a decade ago. Markets in remote corners of the world have now taken to trucks and to SUV's. U.S. manufacturers KNOW how to serve those markets!)
There is no single answer that fits for all would-be sellers in these tumultuous times. However, if you are one of those fortunate middle market business owners who continues to hold up steadily in the face of today's rocky economic environment, you may be especially desirable today. This could be the moment when you show up conspicuously as a very special and a very safe investment for the future. In today's marketplace, continuing strength becomes especially "hot", and may offer that once-in-a-decade chance for especially great potential.
Deborah Douglas, Managing Director and Author
DouglasGroup.net
'Ripe: Harvesting The Value of Your Business'
‘Cashing In! Selling Your Company for Maximum Price'
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