The deal market remains hot, but many believe we’re coming to the late innings of an economic cycle. So, as the first quarter of 2019 wraps up, local executives, investors and advisers are watching closely for the slowdown that could be on the horizon.
Thus far, prices are holding up in terms of multiples, capital is still readily available for private transactions, and the mergers and acquisition climate in Pittsburgh remains fairly strong, says Jim Altman, senior vice president and middle market regional executive leader at Huntington Bank. However, the transactions funded in the public markets are somewhat turbulent from concerns about China, interest rate uncertainty and slowing global economic growth.
“Capital for private deals should remain favorable in 2019, as there remains enough unused powder with private equity funds,” Altman says. “But the sales price multiples may be impacted by an expected slowdown in economic growth.”
That slowdown could come in 2019, but he says it’s more likely to hit in 2020 or 2021.
As Western Pennsylvania dealmakers prepare to gather in downtown Pittsburgh on March 21 for ASPIRE 2019, Smart Business spoke with some of the players who drive local M&A activity about what they saw in 2018 and what they anticipate next.
Winds of change
When dealmakers are asked if it’s better to be a buyer or seller, the answer depends on your perspective.
Altman doesn’t believe the market has shifted from a seller’s market, yet. Demand still exceeds the supply, which favors sellers.
Christian A. Farmakis, shareholder and chairman of the board at Babst Calland, agrees that sellers still have the advantage. They were able to obtain higher than expected enterprise value on sales in 2018. There also weren’t as many distressed businesses available for buyers to take advantage of bargain pricing.
However, he knows that could change.
“We are keeping our eyes on political and economic factors, which could cause a slowdown in 2019 or beyond, like slowing economies in Europe, tariff concerns and the effects of absorption of the recent federal tax cuts,” Farmakis says.
Greg Steve, senior vice president and regional sales manager at Wells Fargo, says strong valuations and market liquidity make it a great time to be a seller, but that doesn’t mean there aren’t good opportunities for buyers to create value via improved operations, expanding geographically and M&A synergies.
He expects the regional M&A market to remain solid in 2019 but understands the window for higher valuations may be closing if expectations of future earnings start to slide.
“The opportunities for distressed M&A buyers may expand later in 2019 if the economy finally slows and corporate orphans and/or underperforming companies are put on the market,” Steve says.
Ronald Donatelli, president, Pittsburgh region, at First National Bank, however, thinks the momentum is shifting to buyers, who are concerned about the potential end of a long-run/bullish economy.
“It is a better time to be a buyer today, and going forward, due mainly to the overall economy potentially slowing down,” he says. “This could lower multiples and take some groups out of the market.”
Buyers are looking to adjust purchase prices appropriately, but that depends on what sector the target company operates in, Donatelli says.
Thomas L. Bakaitus Jr., tax partner and operating officer at Herbein + Company Inc., says most of his clients want to sit tight for the next year or so.
“The tax climate, foreign relationships, uncertainty on interest rates and overall political climate have made my clients very anxious,” he says.
He’s also seeing less cash exchanging hands and more rollover equity or mergers.
PE reacts
The region’s bankers, lawyers and accountants aren’t the only ones keeping an eye out.
Stephen J. Gurgovits Jr., managing partner of Tecum Capital, says his PE firm has plenty of capital to deploy, despite a record year of investments from its funds. But he is thinking more about a global slowdown, even though it hasn’t manifested within Tecum’s portfolio.
“We are certainly more aware and keeping a closer eye on markets and monthly performance, while watching key economic indicators for more clarity. We are moving into 2019 approaching deals with a little more caution, but we are also fairly conservative in our investment philosophies anyway,” Gurgovits says, adding that perhaps a slowdown will bring rationalization to valuations.
