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Brad Carlson- Idaho Business Review Monday, December 17, 2007
Buying and selling businesses should continue at a strong pace for the next couple of years in Idaho despite recently tighter credit conditions and the housing slowdown.
The current growth cycle for business acquisitions and mergers isn’t over, and trends tied to demographics and Idaho in-migration should drive continued buying, Art Berry and Meg Carlson said in interviews. Berry heads business brokerage and commercial real estate firm Arthur Berry & Co. Carlson is principal in C&H Group, which helps mid-sized businesses improve their operations and prepare for eventual sale.
“I expect the market to remain strong in all sectors of mall businesses that are not impacted by residential housing construction,” Berry said. Financing remains available for buying high-quality businesses, and Idaho’s population growth bodes well for demand as well as strong pricing by sellers, he said.
“We’ve probably got at least another two to three years on the M&A side where we’re really hitting high numbers,” Carlson said.
Growth cycles in the M&A market typically last seven to eight years – until an economic change, lack of supply or lack of funding takes hold, she said. The current cycle started in 2004.
M&A volume remains well below the traditional peak as a percentage of the total market capitalization of U.S. companies, Carlson said. It’s about 7 percent now, and usually peaks at about 20 percent, she said, citing a recent report by Michael Hecht of Banc of America Securities.
Hecht also says in the report (www.midmarketplace.com/about/news/MA%20Boom) that activity should stay strong because there is a $1.5 trillion backlog of 2,721 deals announced this year not yet completed. About three-quarters of those deals should close by the end of this year, he said.
The recent credit crunch tied to sub-prime mortgages generated “fretting” in the M&A market, Carlson said.
Some large private equity groups are having trouble closing deals at projected prices and deadlines, she said. “Now we’re seeing that it’s not quite so easy (for private equity groups) to raise new funding.”
Why is there still room for the business-acquisition market to keep growing,Carlson asked, because the market hasn’t seen any slowdown in the middle market and lower middle market. And demand from corporate buyers figures to strengthen, fueled by their own growth needs and an increase in available businesses as baby boomers make retirement plans, she said.
The demographic trend should put downward pressure on prices – from about seven to eight times earnings now to five to six times earnings, she said. The earnings are expressed before interest, taxes, depreciation and amortization.
Private equity deals haven’t dried up, but these buyers are getting more specialized, selective and segment-focused, Carlson said.
Compared to a private equity buyer, the corporate buyer is often more focused on long-term strategic value – boosting revenues in its own core business and the acquired business, she said. This type of deal typically presents return-on-investment opportunities that go beyond simply cutting costs, she said.
Speculative mid-market business acquisitions by hedge funds have slowed way down, Berry said, but conservative acquisitions of longstanding, midsized businesses continue.
“With interest rates getting lower and profits increasing, prices are increasing,” he said. That’s the case for good businesses of all sizes, he said.
Exceptions can be found in some businesses that support residential construction, Berry said. Some have seen their values drop substantially. Those lacking a backlog of work often can’t be sold easily, he said.
The largest private employer in Idaho, Micron Technology, downsized this year. So far, that doesn’t seem to be affecting other businesses that need to grow to keep up with population increases, Berry said.
Demand is strong in sectors including technology, health care, energy, wholesale distribution, and business services that are transactional, she said. Idaho, eastern Washington and western Montana continue to report good economic fundamentals, Carlson said.
Berry said small and midsized businesses will be an important driver of the Idaho economy in the next 20 years, given that the state has lost a number of major corporate headquarters in the past decade.
Twenty-five percent to 30 percent of private equity specialists who Carlson talked to at a recent conference said Boise was on their short list of places where they want to buy a business, she said. Almost no one said that at the event several years ago.
Edition Date: 12-17-2007
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