2018 was one of the most interesting and exciting years in history for middle and micro-market merger and acquisition activity. 2019 promises to deliver much more of the same.
Strong job growth reflects the overall economic confidence that pervades our outlook for the coming year, regardless of the recent volatility in the stock markets, uncertainty over interest rates, impeachment or the length of a government shutdown, or looming international conflicts over trade and other economic issues.
Expect a robust year as ample equity capital continues to chase the next, best deal and seek it out across manufacturing, health care, IT and the sub sectors of each. The competitive nature of American deal makers persistently overrides concerns about a worldwide economic slow down or political turbulence on the domestic front.
The benefactors of cultural entrepreneurship have become the beneficiaries of cultural upheaval. The more Americans are comfortable with change, the more frequently the next emerging business or idea seems to get capitalized.
So if you’re thinking of holding off on an acquisition or exit in 2019, be prepared to pay even higher prices next year, or watch as your competitors cash in and force you into another phase of innovation before you can retract capital that’s moved on to a different deal.
With that thought in mind, let’s take a quick peek at how deal flow is likely to key off of various economic indicators.
Among the many experts foretelling a volatile year on the market in 2019 is Allianz SE Chief Economist, Muhammed El-Erian, as reported during an interview with El-Erian on Fox Business at year end. In spite of volatility, he also suggests a recession is rather unlikely in 2019.
While it’s impossible to predict the range of volatility, 4th quarter M&A activity suggests it will not slow trends in acquisition or new capitalizations either. A more severe and sustained decline in the markets would ultimately slow M&A momentum, but it seems much more likely there will continue to be tradeoffs between profit taking and new buying opportunities, and the market itself will not dramatically impact the middle markets, at least not in a negative direction.
Jobs are a tricky barometer for evaluating mid-market activity. For one thing, they tend to lag behind other indicators. But that isn’t always the case.
Those of us old enough to remember, can reflect on the 90’s era trend of merger activity, followed by job cut announcements, then by rising stock prices, and finally even more merger activity. While job cuts still portend higher profits in general, the age of cutting domestic jobs to replace them with cheaper labor overseas is gone.
Instead, extraordinary increases in worker productivity have begotten extraordinary opportunity for middle market businesses to join in the trend of the mega corporations to grow through accretion rather than attrition, reversing the norms of the previous era. Expect job growth to continue at a record pace, and merger activity to be fueled, in part, by the presence of a capable and well compensated labor force within targeted companies.
Outside the financial sector, i.e. real estate, banking and insurance, interest rates tend to have only a marginal effect on M&A activity. Nothing could prove this better than to look at the results of 2018. Even while the Fed increased rates multiple times, a record number of private equity and venture capital deals were being closed.
While the Fed is shifting from a pre-planned rate increase strategy to a more data driven approach to rate setting, rate increases are generally made so carefully and incrementally, the likelihood of any impediments to mid- or micro-cap activity is small.
An abundance of prognostication exists comparing industry sectors prospects for activity in 2019. There seems to be strong consensus that the health care sector will continue to see exceptional deal flow, especially in technology rich segments of the broader sector. But there’s seems to be only a bit less enthusiasm for the IT and manufacturing sectors than health care and biotech.
Overall 2019, particularly the first half of the year, appears to be a great time to be a seller of a company with a target acquisition price of anywhere from $1-50 Million. Above $50 Million, the market remains strong and could be even better, however, broader market conditions will impact companies at higher levels of capitalization faster if the economy slows.
Deal flow should be very good in the early part of 2019. It could be a good time to follow the old adage and “make hay while the sun shines” – sooner or later, it will eventually go down.