Strategic Corporate Buyers Are Waiting in the Wings

By Jack Lyons, Mergers & Acquisitions Advisor and Certified Exit Planning Advisor (CEPA)

As of March 2010, corporate merger & acquisition buyers have more than $1 trillion of capital on their balance sheets and are looking for quality companies to acquire. We’ve seen an uptick in merger & acquisition buying interest and activity by strategic buyers in the last six months. Based on our current experience and also on an Association for Corporate Growth DealMakers survey, we expect that strategic buying activity will far exceed financial buying activity in 2010. In fact, respondents to the survey favored strategic versus private equity M&A buyers by a ratio of three to one.

Three years ago the valuations paid by strategic and private equity M&A buyers were similar. One reason for this was that the private equity buyers were able to fund acquisitions using a significant amount of leverage, which inflated the valuations they were willing pay in a strong economy. Today, however, merger & acquisition valuations are lower than they were three years ago, the economy is not as vibrant, private equity firms are not as able to borrow such a large proportion of the purchase price, and many private equity portfolio companies have become troubled investments. This is a significant merger & acquisition opportunity for those strategic M&A buyers who have increased the capital on their balance sheets over the last three years and are ready to do some mergers & acquisitions.

Even though corporate strategic buyers want to find acquisitions today, many of these buyers are having some difficulty finding the right acquisition candidates. Corporate strategic buyers that historically did many acquisitions in a year reduced their acquisition activity in the last three years, and those that typically sought only one acquisition at a time tended to sit on the sidelines. Merger & acquisition supply and demand in the last few years decreased, which affected deal flow in general.

Now, however, strategic corporate buyers are seeking to increase their deal flow, but there is a lack of quality investment opportunities available for mergers and acquisitions at this time. Many companies have been hurt by the recession and are off the mergers & acquisitions market due to both decreased valuation possibilities and the owners’ perception that if they wait only a short time, their valuations will increase dramatically.

We think that there will be many disappointed business owners who are currently thinking that their company valuations and after-tax returns will increase significantly in the next few years. Why? A weak and fragile economy, high unemployment and lack of job creation, out-of-control government spending, potential tax increases, the possibility of deflation, uncertainty about the future, and tight bank lending.

The lack of merger & acquisition activity in the last two years cannot go on forever because eventually the baby boomer business  owners will have to sell their companies if they want to retire. People can put off selling their companies for only so long unless they have no intention whatsoever of retiring.

M&A BuyersIf history repeats itself, I think that three years from now I’ll be talking to many business owners who will express regret for not having sold their companies earlier rather than later. For this reason I think it’s prudent to give serious thought to whether it really makes sense to wait until a later date to sell your company if you want to eventually retire and can afford to do so at this time.

A very wise person once said to me that there is no hope, there is only now. Not taking action now toward achieving your goals only increases the risk of never achieving those goals. Please consider this as you review your personal goals regarding selling your company.

Jack Lyons is a Mergers & Acquisitions Advisor, a Certified Exit Planning Advisor (CEPA) and president of Lyons Solutions, LLC. He can be reached at 203-642-4141 or at jlyons@lyonssolutions.com.

Copyright 2010 Jack Lyons. All Rights Reserved.