There’s budding optimism in the mergers and acquisitions market, with industry insiders anticipating a pickup in activity this year despite a slow start.
“There are signs of stability in the economy, and we’re seeing more interest from sellers wanting to go to market,” said Allan Siposs, managing director of FMV Capital Markets LLC in Irvine. “On the flip side, private equity firms and other buyers have a tremendous amount of capital. The number of businesses that have approached us in the past two or three months has gone up twofold.”
FMV Capital Markets is an investment banking affiliate of FMV Opinions Inc. The investment arm was set up in 2005, sprouting from the company’s core valuation business.
Siposs said there’s a “use it or lose it” nature to private equity money: Fund investors want to see their money used to make more money. So these “war chests of cash” could drive new deals, he suggested.
“For companies that are doing well, there is a tremendous amount of cash chasing them,” Siposs said.
Mark Sederquist of Merrill Lynch Wealth Management said his Laguna Hills office also has seen more clients approached by suitors.
“In Orange County, it’s everything from healthcare companies, healthcare providers, assisted-living companies and defense contractors,” he said. “People are stepping into the marketplace.”
Sederquist is director and senior vice president of investments at the Bank of America Corp.’s financial advisory segment.
“Time to Sell”
“What’s driving the deal-level activity isn’t necessarily just the amount of money that’s available,” said William Simpson, a partner at the Costa Mesa office of international law firm Paul Hastings LLP and head of its global private equity practice. “It’s also the number of companies that’s finding a good time to sell.”
Meantime, business owners who missed out selling in favorable prerecession years finally may be ripe for transactions.
“Candidly, greed prevented a lot of deals from happening,” FMV’s Siposs said. “There’s a lot of psychology involved in our business. People who were considering selling between 2005 and 2007 made the mistake of setting expectations based on hearsay. They turned down good offers. But now, a lot of people are saying, ‘I’d sell in a heartbeat if I can get three-quarters of that offer now.’ ”
These owners who had planned to wait a few years before retiring might have ended up waiting longer than planned.
“This gets to the baby boomer thing,” Siposs said.
Data from Washington, D.C.-based nonprofit research group Pew Research Center show that about 10,000 boomers have been turning retirement age each day since January 2011, a trend that will continue for the next 19 years. Those born from 1946 to 1964 represent 26% of the U.S. population.
Boomer Concentration
“A huge amount of Baby Boomer-owned businesses will be transitioning ownership in the next five to 10 years,” said Dan Lubeck, managing partner of Solis Capital Partners LLC in Newport Beach. “It’s very interesting just how important lower-middle market private equity could be to the American economy. A high concentration in Southern California is businesses that are owned by Baby Boomers. We’re right in the heart of the bulk of those businesses.”
Merrill Lynch’s Sederquist agrees.
“There’s a tremendous amount of opportunities coming up directly tied to the boomer generation,” he said. “Retirement isn’t so much about traveling or buying the second home anymore but doing the next business, the next venture; 65 years old is now young. We’re seeing firsthand how boomers are looking to transition the business. It’s a cultural shift.”
Also putting weight on the gas pedal for mergers and acquisitions might be the uncertainty on taxes.
“The tax law changes at the end of this year unless Congress does something,” Siposs said.
The rate on long-term capital gains is 15% but would increase to 20% next year barring congressional action.
“That’s a one-third increase in tax rate,” Siposs said. “And the state level might mirror the federal increase. A company might not be worth a heck of a lot more next year, so some people might be driven to sell this year.”
