future. A recent article from the Association for Manufacturing Excellence cited predictions that five years from now 80% of North American homes will have a 3D printer. I think that’s optimistic, but the trend it indicates is certainly noteworthy,” said Douglas.
3. Recent tax changes may whet acquisition appetites even more
Changes to the tax law that will impact M&A activity are somewhat complex and not simple to evaluate, said Douglas, “but they generally enhance outcomes for investing buyers and, thus, enable them to be aggressive in pricing. In cases where a seller company needs significant asset additions to progress long term, the new deductibility of capital expenditures may be an extremely significant enhancement to a deal in the early years of ownership by a buyer,” said Douglas. “Additionally, most forms of buyers, whether they are a C-Corp, S-Corp or other entity, will pay a lower overall rate, and thus benefit. There will be certain limitations as to deductibility of interest, which also must be baked into any tally of impact, but the outcome points toward a major positive impact on probable M&A activity,” said Douglas.
4. Interest rates remain amazingly competitive
Almost every acquisition requires an equity investment that will be backed by substantial borrowing. The cost of such borrowing, thus, is an integral and fundamental part for determining the expectations of a profit outcome from a transaction, said Douglas. “In the first decade of the 2000s, prime interest rates generally ranged from about 5.5 to 7.5%. In recent years, they have dropped and held steady at much lower rates, generally ranging from about 3 to 4%. The impact on both the total cost of an acquisition, and on resulting appetite for transactions has been remarkable,” said Douglas. “Buyers can afford to pay more for the company they want to acquire!”
Acquisition activity in 2016 was strong, with both the number of transactions and transaction pricing up substantially by historical measures. Since then, transaction counts have climbed even more: Investment firm P&M Corporate Finance reports 355 deals made in 2017, up 6% for the year, while investment bank PMCF counts 359 transactions in 2017, up approximately 7% for the year. Beyond the count, advisors agree that 2017 transactions are consistently showing even more astounding pricing than ever before.
Will acquisition markets flourish for several more years, or will the historical swings in market “mood” hit us soon with a downturn?
“That is a question we hear every week,” said Douglas, “as owners try to plan for the right timing for a possible sale. M&A markets and transaction pricing are very likely to hold in the near term, with the help of the major factors described above.” It’s also true, however, that the long-term historical ebb-and-flow cycle will reassert itself at some point. We don’t know when that will happen, “but we hope it’s not for a few more years!” said Douglas.