Banking & Finance and Opinion

APPEL: Mergers and acquisitions will accelerate by midyear

January 26, 2013

AppelSavvy Indiana business owners rightly wonder about the merger-and-acquisition and capital market outlook for 2013. Unfortunately, it is likely mixed, with a sluggish outlook for the first half of the year. However, many hope that, by midyear, there will be a pickup to end the year strong.

Ernst & Young, using Thompson Financial data, reported that United States and international M&A activity declined in 2012. Deal volume was down 10 percent and overall deal value slid 26 percent, which by historical standards made it the slowest M&A year since 2002. Most blame a higher level of uncertainty that hung over the market for much of an election year.

However, in Indiana, a flurry of fourth-quarter activity should show, when the numbers are released, strong middle-market deal volume that will actually have made for a good year.

The end-of-the-year activity was predominantly driven by expected changes in tax codes. Private business owners faced a 60-percent federal tax increase between 2012 capital gains rates of 15 percent versus expected 2013 rates of 23.8 percent (3.8 percent for the Affordable Care Act tax on top of 20-percent capital gains). Dividend recapitalizations were also popular, given the qualified dividend rate was expected to change back to ordinary income rates without congressional involvement.

Because of some of the “pull-forward” effect of 2013 deal flow back into 2012 for tax reasons, most in the deal community anticipate a slower start to 2013.

Several factors, though, should spur activity by midyear.

Business owners will have access to more capital. In Indiana, we’ve seen new banks, including First Financial and U.S. Bank, come into our marketplace who are looking for deals. Bank balance sheets are repaired and commercial bankers are looking for quality loan volume.

Many owners will also take advantage of historically low interest rates and continue to refinance older, more expensive loans.

We are fortunate to have a strong local private equity presence. Established firms such as Cardinal Equity Partners, Centerfield Capital Partners and Hammond Kennedy & Whitney are seeking deals in which to deploy capital in Indiana-based companies.

The rebound in capital markets is good news for business owners considering a sale or recapitalization.

Indeed, in 2013, business owners of well-run organizations should see business valuations remain strong given the thinner supply of quality businesses available, at least in the first half of the year.

Private-equity-owned companies in Indiana, particularly in the manufacturing and industrial sector, will be likely candidates for sale given the improving manufacturing economy as well as the need for their fund owners to monetize longer-tenured assets within their funds.

Given the favorable capital environment, there is now light in the tunnel for business owners to consider private investment in 2013. But perhaps as important is the positive impact it is often shown to have.

According to the Association for Corporate Growth, which combines independent data from two well-regarded databases, Pitchbook and National Establishment Time Series, private Indiana companies backed by private capital grew jobs 119 percent versus 5 percent for all other Indiana companies from 1995 to 2009. Similarly, private-capital-backed companies grew sales 204 percent compared with 25 percent for all other Indiana companies.

With considerable capital available and looking for acquisition investment opportunities, Indiana’s strong business climate and continuing rise in innovation will ideally keep us as one of the Midwest’s leading states for corporate growth and deal activity.•

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Appel is vice president of Gregory & Appel Insurance and president of the Indiana chapter of the Association for Corporate Growth, a global resource organization for middle-market dealmakers and business leaders who invest in growth and build companies. Views expressed here are the writer’s.

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