Aethlon Capital’s Sima Griffith participated in a panel discussion at Faegre Baker Daniels’ M&A Conference in Minneapolis. Some highlights of her remarks appear below:
How has recent M&A deal flow been?
During the first half of 2017, M&A activity moved full speed ahead and valuations for the best performing companies were sky high! The majority of acquisitions that crossed the finish line were not the giant billion dollar “transform the company” mega deals like Amazon’s recent purchase of Whole Foods or Sherwin Williams acquisition of Valspar. They were more modestly sized like ConAgra’s recent purchase of Minnesota-based Angie’s.
What are the reasons behind the decline in mega deals?
Given the current bull market, acquiring publicly traded companies has become a lot more expensive. It’s harder for Boards to justify paying big premiums over the current rich share prices of targets.
We will continue to see robust M&A in 2018 for the following reasons:
- The cut in corporate taxes will give companies more cash to make acquisitions.
- The reduction in estate taxes will incentivise more families to sell their businesses.
- Businesses will show improved profitability making them more attractive to buyers.
In summary, things are bullish in the M&A market, and there’s not much to complain about!
How are strategic and financial buyers behaving in the current market?
Financial Buyer Trends:
M&A Magazine’s October cover story was “Go Small or Go Home.” The story points out that because private equity is becoming crowded with too many players, many PEs are now focusing on the 350,000 companies that populate the lower middle market. They are looking to create a proprietary, special market niche for themselves. There isn’t as much battling over targets and they don’t have to compete as much with other PEs and corporate buyers.
That being said, the lower middle market is still competitive, therefore many PEs are specializing in specific industries like food or health and wellness where they have expertise and operating partners to help grow these smaller niche companies. For example, I just received a marketing e-mail from Riverside, a NYC-based PE talking about the fifth add-on acquisition they made on behalf of their traffic management business.
In summary, low interest rates and the need to grow market share and earnings are fueling these mega deals.
Strategic Buyer Tends:
The CEOs and CFOs I talk with tell me they devote time on their calendar to scouting for acquisitions. On average, they turn down nine out of ten deals either because:
- It doesn’t fit their strategic growth plan, or
- The seller’s price is too high, and they can’t realize an appropriate return on investment.
Some strategic buyers are now using PE funds as their farm system to find acquisitions. Just like the Minnesota Twins have a farm system of seven minor league teams in different parts of the country, some smart corporate acquirers are forging relationships with PE funds that specialize in their industry. Earlier I talked about ConAgra buying Minnesota based Angie’s Kettle Corn. That’s a great example of a corporation using a PE fund as a farm system. They bought Angie’s from TPG Growth—who bought Angie’s three years ago—when Angie’s was too small an acquisition for ConAgra. And just like the Minnesota Twins brought up Byron Buxton to the major leagues from the farm system, ConAgra is pulling up Angie’s to the major leagues.
Are the days of conservative buyers winning deals over?
Yes! During the last few years, acquirers have had to take on more risk as buying smaller companies carries more risk. Their earnings tend to be much choppier.
Bet the company, mega-deals which cost a lot of money are also very risky. When buyers pay such rich premiums for targets, it’s harder to make the return on investment work.