An improving global economy coupled with decreasing uncertainty, large cash reserves and attractive acquisition and investment opportunities saw confidence in M&A return in 2013. A continuation of these factors promises to run through 2014 with increasing competitiveness for opportunities from corporates and private equity acquirers driving deal values back to pre-recession levels.
The M&A lifecycle, like any other industry, experiences phases of growth, maturity and decline, with full cycles typically lasting 7 or 8 years. The last M&A industry peak was experienced in 2007/8 and as such, moving into 2014 we should be again looking towards the maturity phase of the M&A lifecycle. This, however, is not the case due to the global recession which served to prolong the decline.
The strengthening activity throughout 2013, particularly H2, confirmed that the M&A industry is now firmly within the growth phase of its lifecycle, typically the most profitable time for sellers as demand increases significantly whilst exiting business owners are slow to capitalise on the positive market conditions, reducing supply and increasing values paid.
In a recent survey of over 1000 corporations and private equity professionals conducted, 37% of respondents said that their companies planned at least one acquisition in 2014 with the most prominent reasoning being ‘large cash reserves/commitments’, ‘opportunities in emerging markets’, ‘availability of credit on favourable terms’ and ‘improved consumer confidence’.
Over three quarters of of acquisitions are expected to fall into the sub $250m mid-market category. The focus on the lower mid-market is primary due to perceived difficulties in getting larger deals over the line and a greater confidence surrounding smaller deals. Additionally, large corporates acknowledge the advantages in smaller deals as they are easier to finance and integrate.
Corporate buyers largely maintain a competitive advantage over private equity buyers due to an evidently greater willingness to part with higher prices. The primary reasoning behind this is an increased ability to realise potential synergies presented by an acquisition. It is also of note that many corporations posses large sums of cash and an increased value of stock to use as currency.