State of the M&A Market – Q2 2013

Cultivated by the globalization of business and the desire of foreign buyers to access sophisticated markets, the world appeared to have become a much smaller place through mid-year 2008.  Buoyed by a soft U.S. dollar, the desire of foreign companies to acquire well-known brands and driven by the need to access advanced technologies, the U.S. became an attractive marketplace for takeover targets.  As a result, investments in U.S. targets by non-domestic participants grew as a percent of total M&A transaction volume.

“Stay close to home” appears to be the mantra of most U.S. M&A transactions.  Buyers purchased businesses close to home (in the same region) nearly 50% of the time in 2012. This “home proximity” increases to 75% when adjacent regions are included. This data from 2012 is not surprising, as this is a ten year trend in acquisitions. In 2002, 46% of U.S. M&A transactions, with a U.S. buyer and target, involved a buyer and target located in the same region. Between 2002 and 2012, the percentage of intraregional transactions varied slightly, depending on the market; however, it has never fluctuated more than 4% from the 2002 level.

Wind power has a history of boom and bust cycles which has created a significant challenge for investors that are seeking to deploy capital in this sector. Currently, wind is highly dependent on government subsidies that need to be renewed periodically. The most recent extension, which was passed in early January 2013, has created a significant opportunity over the next two years, but what happened at the end of 2012 was very telling.

For a variety of reasons, the acquisition of medical practices by hospitals has become more attractive in recent years. The volume of acquisitions is increasing steadily and therefore physicians and their advisors need to understand the valuation process which drives the purchase price. Almost all hospitals hire a valuation firm that “represents” their interests. We believe that in order to level the playing field, each party should retain their own valuation experts.

Dating back to the mid-nineties, private equity funds have experienced two significant bubbles driven by major economic events impacting capital fundraising: the technology bubble of 2000 followed by the “Great Recession”.  As depicted in the graphic below, private equity fundraising peaked at more than $300 billion in 2008 before sliding to less than $70 billion in 2010.  Interestingly, the annual average for the past four years was approximately $100 billion and is only slightly below the “bubble” level of FY 2000.

The supply of global energy appears to be shifting and the United States is the primary beneficiary. According to the recent International Energy Agency’s (IEA) World Energy Outlook, the world is in the process of significantly changing the countries that supply fuels as well as the types of fuels used to provide power around the world.  The headline from the report states that the global energy map is changing with the primary impetus being unconventional oil and gas production in the United States. Access to unconventional sources of oil and gas has expanded production, which has led to greater resources and better fuel pricing, spurring economic activity and changing the face of global energy trade. As a result, this and related sectors should expect high levels of investment and power industry M&A activity for many years to come.

The flexibility available in the sale of a business to an Employee Stock Ownership Plan (ESOP) is often the reason that business owners choose this tax-advantaged liquidity strategy.   Considering a sale to an ESOP is often, but not always, the answer to our clients’ liquidity questions.  The list below contains many of the questions where “consider a sale to an ESOP” is the answer.

Foreign Acquirers

There are times in our lives we each look back upon and say “if only I had”. For many of us those times seem to be focused on events (or non-events) such as “if only I had invested in Microsoft in 1992”, or “if only I had sold my house in 2006.” In terms of estate planning that involves the transfer of ownership interests, we are experiencing a time that will become one of the “if only” times for those who do not act now.

The long-awaited opinion issued in late June by the U.S. Supreme Court clarified the constitutionality of the Patient Protection and Affordable Care Act of 2010 (“PPACA”).  The Court ruled that the requirement that every American carry health insurance is a tax and as a result, is constitutional.   The ruling permits the federal government to pursue a broad expansion of the Medicaid health program for the poor.