Michigan's mergers and acquisitions market heating up, creating a sellers market
December, 09th 2014
The availability of capital is heating Michigan’s mergers and acquisitions market with the deal-making driven by companies making strategic moves and private equity firms looking for places to invest.
“There’s no question that the M&A market is very hot and probably the hottest it has been in at least seven years,” said Brian Page, an attorney with the Dykema Law Firm's M&A division in downtown Grand Rapids.The firm has 12 offices nationwide that provide advice to public and private companies.
A recent survey of 190 senior executives and advisers shows nearly 60 percent expect to be involved in an acquisition in the next year, while only 35 percent anticipate involvement in a sale.
One reason for the buying spree is that money is cheap. Banks are eager to provide financing for acquisitions, according to those involved.
West Michigan corporations Wolverine Worldwide and SpartanNash have signaled to analysts that even after recent major acquisitions they are on the lookout for more companies. Office furniture giants Herman Miller and Haworth recently make significant purchases.
RELATED: Analysts: Is Wolverine Worldwide gearing up for shopping spree?
At the other end of the spectrum, smaller companies are putting themselves up for sale. In many cases, Baby Boomer owners of these businesses are ready to retire.
“They are concerned about the window closing," Page said. "What happens in 18 months if the economy slows down and the window closes."
That demand is driving up the value of companies, said Randy Rua, founder of Rua Associates, a 16-person firm with offices in Zeeland and Grand Rapids.
“We are seeing valuations we haven’t seen in the last five to 10 years,” Rua said. “It’s a sellers market right now and there’s a lot of opportunity.”
On the other side, Rua says he isn’t seeing a lot of businesses that are in a hurry to sell, although owners are willing to talk to buyers.
“We talked to 100 business owners and about 30 percent of them don’t have exit plans,” Rua said. “And they say they need to figure out something in the next three to five years.”
Rua says the best window for a sale might be now because of the higher valuations, lower interest rates and growing demand.
His firm tends to work with companies in the manufacturing, distribution and service industries. Most are in West Michigan and are family-owned with revenues between $1 million to $50 million.
The firm has shepherded the acquisition of Specialty Heat, which has locations in Holland and Grand Rapids, to a strategic buyer from England.
Two years ago, the firm helped with the sale of Worden furniture to a group of investors led by Ken Filippini, former president of Hudsonville Ice Cream. That same group also acquired Taylor, after its merger with Kindel Furniture didn’t gel.
RELATED: Grand Rapids firm betting furniture industry ripe for mergers and acquisitions
Rua moved into the industry after earning his MBA at the University of Southern California and launching a dot.com start up. Like many in the late 1990s, his Los Angeles business flopped after the funding was pulled.
After returning to Michigan, Rua bought two companies that he merged later and sold. Rua enjoyed the process so much, he decided to go start a business that counsels firms in the buying and selling process.
“It opened my eyes that you can buy and it’s a lot less risky than trying to start something,” Rua said.
Cash, not economic growth, is the primary factor driving merger and purchase activity—for the first time in two years—according to the survey. In the survey, 43 percent of respondents say the availability of capital is most responsible for fueling activity. Another 25 percent cited the U.S. economy.
maxfriar.jpg Max Friar, founder and managing partner of Calder Capital. Courtesy photo
While banks are eager to finance deals, owners are more interested in cash deals, said Max Friar, who started his Grand Rapids firm, Calder Capital, in 2005.
“If we can complete a deal with without a bank transaction, it is much easier,” Friar said. “I would say all-cash offers are fairly common. A lot of owners are not interested in a financing deal. When it comes down to it, they’ll accept less if it is all cash.”
His firm works with companies in the $2 million to $5 million range, mostly in the manufacturing, distribution and service sectors. Calder Capital finds potential buyers using confidential marketing that describes the business but doesn't reveal the owner.
"If someone owns a $5 million manufacturing company and they own their own products, and the business is profitable, you would have buyers lined down the block," Friar said.
Many of the sellers Friar works with are between the ages of 63 and 85, who are enjoying the rebounding economy but are wary of getting caught in another recession.
Friar says making a deal happen is more complex that find a buyer with money.
“There is a myth that mergers and acquisition is 90 percent financial,” Friar said. “Ultimately you are dealing with matching people up together and seeing if they hit it off and seeing if they see mutual opportunity.”
Healthcare is the sector that is expected to fuel the most activity, according to the survey results. That’s a shift from a decade ago when technology was considered the hottest industry by the majority of respondents. Nationally the healthcare sector has been extremely active over the last two or three years.
“Cleary, upsizing is a trend in the healthcare area,” Page said.
In Michigan, a significant amount of activity has been in the auto industry.
“Private equity companies have become very interested in the auto interest in the last few years because the values were low,” said Tom Vaughn, A member of Dykema’s Corporate Finance Practice Group in Detroit. “It just offered a good return for investors.”
Page doesn’t expect deals to trigger big job layoffs among the rank-and-file, but he says there might be job loss at the executive level because of an overlap of leadership positions.
Michigan companies are already lean after coming out of the Great Recession so the focus will be on driving revenue growth.
“They are not sitting there with extra fat or overhead,” said Vaughn. “The companies I talk with feel they are doing more with less than ever before.”
In the firm’s inaugural survey in 2005, 51 percent of respondents had either a positive or somewhat positive outlook about U.S. economy, and 81 percent felt the same about the future of the M&A market. A decade later, 62 percent of respondents are positive about the U.S. economy, 59 percent feel the M&A market will be stronger next year.
There will be an uptick in activity in 2015 especially with privately-owned businesses, said Jin-Kyu Koh, leader of Dykema’s corporate finance practice group in the business services department.
“Based on the M&A work we are seeing and the data in this survey, we anticipate that M&A activity will at least remain at this level over the next 12 months,” Koh said.