Reasons for Optimism in the Manufacturing M&A Market

 

John Kielich, CPA Managing Director of M&A Advisers   email | bio
LeAnne Foster, Senior Associate   email
November 2010

Uncertainty in the M&A world exists as the economy continues to set the tone for the market.  The anticipated third and fourth quarter surge in merger and acquisition (M&A) activity has not materialized.

Uncertainty breeds caution, which continues to be the dominant player.  Businesses are waiting...waiting for a wave of optimism.  Uncertainty is compounded by the fact that the future market will be impacted by the local, state and federal elections as well as any major legislation that waits to be passed after the elections.  How will financial markets react to changes in Washington?  Will taxes increase for those with greater than $250,000 in income, and how high will taxes on capital gains and dividends go?  How will those elected candidates who are running as Independent affect the political landscape?

Owners of manufacturing companies do, however, have many reasons to be optimistic even today.  Regardless of the results of the November 2^nd elections and subsequent legislation, the M&A market for many manufacturing companies remains very bright.  There are many positive drivers that make it a seller's market.

Manufacturing is historically an area in which bankers, investors and private equity groups have felt confident investing.  The second quarter of 2010 has shown improvement in both deal volume and value according to "Assembling Value:  Second-quarter 2010 global manufacturing mergers and acquisitions analysis" by PricewaterhouseCoopers LLP.  Thirty-three deals were announced in the second quarter (up from 14 deals in the first quarter) with a value totaling $8.5 billion (three times higher than the first quarter).  This is also significantly higher than the second-quarter deal value of $3.2 billion one year ago.

The Federal Reserve Board has recently discussed steps they can still take to boost the economy.  Quantitative easing has led to a weakening dollar, for example the Canadian and Australian dollars are over a one-to-one exchange ratio with the U.S. dollar.  Manufacturers that export will certainly see increased interest from acquirers and can take advantage of this positive economic environment if considering a sale.

An unprecedented amount of money needs to be invested.  Recent reports show that private equity firms have over $500 billion of capital to invest assuming a 50 percent capital investment.  This equates to over a trillion dollars of M&A deal volume.  Synergistic buyers are even more cash-rich with reported cash on balance sheets approaching two trillion dollars.  These buyers are looking for ways to grow.  Organic growth for a number of companies, in particular a number of manufacturers, has been relatively anemic the last couple of years.  The cash reserves that have been built up will certainly be used at some point to grow the top line.

On the credit side, every day brings more optimism.  Banks need to lend money to make money.  JP Morgan Chase recently reported their third-quarter results, which included a $1.5 billion reduction in the loan-loss reserve.  This is a positive sign that banks' balance sheets are starting to heal and with that comes an appetite for lending.  While we doubt and hope we never see the feverish lending practices that led to the economic downturn, we certainly believe banks will take a more aggressive and positive look at transactions with their sights on getting deals done.

If you are a manufacturing company with good products, steady or growing revenue, and other positive attributes, buyers await you.  There is reason for optimism.