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Is it time to sell?

May 10, 2016

Is it time to sell?

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We’re feeling pretty good about 2016. The m&a market in the dozen+ information technology sectors that we follow and sometimes lead is strong. We’re busy. Demand is high for companies that check all the boxes: unique products that address very large markets, defensible market leadership, high recurring top-line growth, substantial profit leverage, strong management, etc. High demand often translates to high values. We recently advised on a sale at more than 30x EBITDA.

But not every company checks all the boxes.  Some have strong products with traditional revenue models; some are more mature and therefore slower growing; some are strong in niche markets, not broad ones; some are reinvesting all cash flow for growth.  Nevertheless, with the global bull market now firmly in its 9th year – significantly longer than average – and m&a values up substantially over the past few years, it is no surprise that many boards, CEOs and business owners are contemplating taking advantage of what they see as a strong market to raise capital or sell. And that has driven some of them to ask us: Is this the time? Our answer is: Maybe. If your company is growing and cash flow positive, your management team is having fun, and your investors are not in a rush – why sell? You probably will be worth more in a year. Timing markets is not an exact science. But if you are seriously contemplating a liquidity event, this is not a bad environment to do so – as long as you are realistic about your own strengths and weaknesses – and value expectations.

This year, as was the case last year, the overall economic fundamentals in both the US and Europe still seem sound: interest rates remain at historical lows; corporate cash is high; energy prices are low. US economic growth has slowed but not stopped, which, paradoxically adds to the pressure on strategics to find new sources of growth. The Eurozone is growing again – albeit slowly – and that gives some more confidence in the future and thus more willingness to acquire. Investors have not entirely gotten past worries about the impact of the Greek debt crisis, the Chinese economic slowdown, Russian aggression in the Ukraine, the crises in Brazil and other emerging markets, or fears of the demise of the European Union – but the panic has subsided. We’ve become largely numb to the impact of the wars in the Middle East – which is unfortunate for the 13 million displaced persons and families of the hundreds of thousands dead and wounded. Central bankers in the major markets seem to be doing their jobs, even if credit markets have tightened markedly: real wages are up a small bit; inflation and unemployment are down – especially among college educated people. People talk a lot about the US Presidential election – but so far we have not detected any serious concern about the impact of the race on the economy or the deal market – perhaps because most people have faith that the governmental checks and balances will keep any President from doing anything truly foolish – in spite of campaign rhetoric. We hope. Right now, it’s more about our perception of ourselves – and how we got here. There are a lot of people bemoaning our choices. But it’s early.

There was a significant amount of activity last year in the b2b data and analytics, fintech, healthcare tech, b2b services and other sectors that we cover, and there continues to be high levels of interest by both strategic buyers and investors in investing in or acquiring strong companies in these sectors. There are more than 10,000 companies in our database – most with under $200mm in revenue. It’s a fragmented market that calls out for re-alignment – and sometimes consolidation. There are many prospective buyers and investors looking to enter the arena – add technology, product, customers – or otherwise capitalize on a rapidly changing environment.

Yet in spite of all the foregoing, dollar volume for m&a transactions thus far in 2016 is off more than 20%. Some of this was to be expected. Last year was a near record for m&a – the highest since 2007, before the global financial crisis – driven in part by mega-deals. There were at least nine transactions valued at $50bn or more and something like 58 valued at $10bn. A lot of the activity was in pharma, food and semiconductors – not our target universe – and further, much of the activity was tax-driven. With governments worldwide looking to capture as much tax revenue as possible, it should be no surprise that they are looking hard at tax-driven mergers. But the decrease in deal value and volume this year is not just because of potential regulatory scrutiny. We are also seeing buyers and investors exercise more discretion – and more caution – when evaluating opportunities. According to Dealogic, proposed transactions worth $376bn globally have been withdrawn already in 2016, compared to about $406bn worth of deals withdrawn in 2007. While some of this was due to regulatory scrutiny, much was for a more fundamental reason: perceived risk.

Sellers de-risk. They trade the promise of the future for more certainty now. Buyers and investors must take risk – giving up the safety of cash, debt capacity or equity for the promise of what is to come. While firms that check all the boxes may command the highest multiples, there is plenty of demand at fair values for interesting companies with strong products and substantial growth potential that are less than perfect.  The more certainty buyers and investors have in the future of these companies, the more they are willing to pay. Conversely, the less the confidence about the future of a target company, the higher the risk premium – in other words, the lower the price they are willing to pay. Strategic buyers and investors are aware that the world is changing rapidly. Many of them are anxious not to be left behind, and often optimistic about the long-term opportunity. At the same time, their optimism is tempered by perceived risk. In the current market, most are cautiously optimistic as opposed to irrationally exuberant – and we see that sentiment growing.

We’re not in the business of telling people if or when they should raise capital, buy or sell. We just help them understand the market – and execute, when they are ready.  Lately we’re telling people that, if you are ready,  the 2016 m&a market is still strong – even if your firm is less than perfect – and we expect it to remain strong for the next 12-18 months – which is about as far out as our crystal ball can see. Sellers who persist in wishful thinking in spite of the realities on the ground may have challenges, but those that have a realistic view of their firm’s strengths and weaknesses – and a realistic sense of value – will find a host of willing investors and buyers. We’re happy to help.


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