Economy Contracts, M&A Grows

This morning’s big news is the shrinking fourth quarter GDP, representing the first time the U.S. economy has contracted since the second quarter of 2009.  It’s a great headline; however, the economy only shrunk by 0.1%, which for all intents and purposes is a flat quarter rather than a declining quarter.  Furthermore, reports cite two specific factors that dragged it down: defense spending and inventory reduction.  These are likely one-time events, and this suggests that the rest of the economy did just fine.

To the contrary, M&A grew exponentially in the fourth quarter, and all signs point to a strong 2013.  Q4′s strength was largely the result of business owners trying to close deals ahead of the so called fiscal cliff, and while this torrid pace may not continue, 2013 may very well exceed 2012.  Multiple factors contribute to this.

First, the effects of the recession are finally off the financial statements of most companies.  During due diligence, a buyer typically requests to review three years of historical financial statements from a seller, and through last year this included a company’s 2009 numbers, one of the worst years in recent memory for many business owners.  Effective this year, most buyers will examine 2010-2012, suggesting they will see three years of solid revenue and income.  This supports higher valuations and encourages business owners, many of whom were holding out for better times, to finally pull the trigger on a deal.

Second, an abundance of capital will fuel transactions.  Morningstar released a report on January 28 predicting that M&A activity in 2013 will exceed that of 2012, citing the availability of credit and equity capital and ripe conditions for takeovers in many industries. While the report focused on mega-buyouts (rumors include Dell and Kohl’s), these same conditions facilitate transactions involving companies of all sizes.

Third, buyer appetite has not waned.  In talking with a few of the corporate buyers with whom we have completed multiple transactions, they declare that they are as busy as ever.  They still have aggressive goals and large budgets, and expect to complete numerous transactions this quarter and throughout the year.

The bottom line is that regardless of economic uncertainty, whether due to the aforementioned GDP headline, consumer confidence, or the general ineptitude of our government, those looking to buy or sell a business should find success in 2013.  We encourage all to embrace the positive news and encouraging market conditions, and seize the moment while it’s here.

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