By Joe Berkery
Right now there is a substantial disconnect between the health of the U.S. economy and overall corporate well being.
Even as economic growth slows and markets fluctuate, corporate profits are relatively strong, balance sheets are brimming with cash and the appetite for acquisitions has improved.
So far this year, our firm has closed a dozen transactions--four in just the past 30 days--and we expect another five or six to close by year-end, making 2011 a good year for middle-market M&A.
Perhaps an even better gauge of the health of the M&A market is not the number of actual closings, but the number of potential buyers who are participating in the auction process. Virtually all of the deals we have managed this year involved multiple qualified buyers, representing both strategic players and private equity investors.
While we anticipate no further loosening of the credit markets, debt is nonetheless available to companies with strong fundamentals and solid numbers. But with so much investable cash on their balance sheets, most of the deals we've done this year were for cash.
The pick-up in M&A activity is often a leading indicator of improvement in the wider economy. Businesses that shed employees and reduced costs while maintaining productivity are more profitable and thus adding to their stockpiles of cash--now estimated at a record $1.84 trillion on corporate balance sheets. And now they're putting some of that cash to work in the form of acquisitions.
Another factor fueling the upturn in M&A is the move by many larger strategics to realign their businesses by shedding non-core assets. We're seeing major players considering or completing divestitures of operating units or entire divisions.
We expect these trends to hold well into 2012, with sellers receiving excellent multiples for quality assets as buyers, both strategic and financial look to deploy their idle, low-interest-earning cash.
Sellers who view the erratic stock market and weak economy as reasons to stay on the sidelines may be missing an opportunity to capitalize on a strong M&A market. While fear may be a reasonable reaction to the policy paralysis in Washington, it's not a reason to postpone a sale of a business to eager buyers flush with cash and willing to pay good multiples. Whatever the direction of the overall economy in the short term, the current M&A market is as good as it's going to be for a while.