The mergers and acquisitions market is continually evolving. The business markets – on a regional, national and global scale – are increasingly connected through M&A deals.
The pandemic, the war in Ukraine, and talk of an impending recession changed many facets of business operations in the last year. While the economy is still a rollercoaster ride, local experts anticipate M&A activity to be strong.
Coming out of the pandemic, many business owners had new perspectives, which continue to influence M&A activity in 2023.
“A lot has changed since the pandemic, including significant interest rate increases that haven’t been seen in decades,” said Jeff Herdzina, president of ExitBig. “This has put significant pressure on banks and the ability of some buyers to secure the necessary lending power to purchase a new business.
With the assistance of government programs such as the Paycheck Protection Program and the Employee Retention Credit, Herdzina said some owners have chosen to sell after strengthening their balance sheets.
Brad Lehl, Omaha-based managing director for Peakstone, a middle-market investment bank with headquarters in Chicago, noted that companies that came out of the pandemic demonstrating a resilient business model became more coveted.
“In some cases, we saw targets trade for higher multiples if they came through COVID in good shape,” he said. “Rather than simply talk about being recession-resistant, companies could point to actual performance during a generational downturn. Many of these companies traded for strong multiples, as there was scarcity value and tangible evidence of a strong underlying business.”
Nicole Konen, M&A shareholder for Koley Jessen, said that companies are now more inclined to consider strategic M&A as a means of diversifying risk and strengthening their competitive positions.
“Deals were happening at extremely high multiples, with extremely speedy closings, and with seller-friendly terms,” she said. “Coming out of the pandemic, considering higher interest rates and more economic uncertainty, earnings before interest, taxes, depreciation, and amortization (EBITDA) multiples have decreased across industries (to levels that were more commonly seen pre-pandemic). In addition, transaction times are stretching longer as buyers are able to conduct more thorough due diligence and be more selective about their investments.”
Both 2021 and 2022 were record years for Carson Group’s wealth management M&A sector. Michael Belluomini, who serves as the company’s vice president of mergers and acquisitions, said that he believes the influx was due to pent-up demand from the pandemic. So far this year, Carson Group has completed four full acquisitions and expects to receive signed agreements for several other opportunities by the end of the year.
“We maintain a strong pipeline of local opportunities in the state,” he said. “Financial services and wealth management remain a vibrant part of the local community. With our respected peers of Orion, Charles Schwab and FNBO here in town, Omaha is a uniquely attractive market for talent. While 2023 will not be a record-setting year, it does forecast to be our third strongest year ever.”
Prominent 2023 Trends
Konen noted that the availability and terms for representations and warranties insurance have become more favorable, but there are fewer deals to obtain it.
“Policies are becoming more customizable for the specific transaction at hand, and coverage is becoming more comprehensive,” she said. “There has also been an increase in issue-specific coverage, particularly for specific matters like taxes, environmental matters and intellectual property.”
She also noted that clients are seeing a higher prevalence of post-closing disputes this year, whether it’s a post-closing purchase price adjustment, disagreement over an earnout, or an indemnity claim.
Rising interest rates and macroeconomic uncertainty are also having an impact on how buyers are entering – or not entering – into transactions.
“Transactions have become more difficult to execute in the past year,” said Gary Grote, managing director at Bridgepoint Investment Banking. “It is more of a buyer’s market, as transaction multiples have declined (still remaining above historical average) and all-cash deals have become tougher to come by. Deal terms like earnouts and seller carryback notes are reemerging in the market. Due diligence is rigorous and protracted.”
Despite that, Grote remains hopeful that Nebraska’s M&A deals will remain strong. Earlier this year, Bridgepoint worked on a significant M&A deal with an Omaha-based business nurse staffing firm.
“The metro area has proportionately more nurse staffing firms than any city in the country, a result of industry pioneer Larry Courtnage (C&A Industries founder) building a significant staffing firm here that spawned numerous startups through the years,” he said. “We anticipate further staffing industry consolidation, so the metro area should remain in the M&A spotlight.”
Herdzina reiterated how interest rates have been one of the biggest current challenges, as it’s driving down deal value. However, that’s not completely preventing deals from closing.
“This doesn’t sit well with many sellers who have worked much of their life growing their business and have a target age to sell,” he said. “As a result, we are seeing more deal value being placed in seller notes with lower interest rates to narrow the gap between the parties. This helps the buyer have more affordable debt service and the seller can reduce some tax liability by deferring purchase price until they receive payments on the seller’s note. This helps the bank as well have less risk on their note.”
For Peakstone, add-ons are making up a large portion of the company’s recent deals.
“Strategic buyers are still looking for add-on acquisitions, especially those backed by private equity firms,” Lehl said. “Firms that have funding in place are well-positioned to win deals that don’t depend on new loans.”
Forecasting for the Remainder of 2023
Experts noted that M&A movement has been slower this year compared to the onslaught of deals that happened amid the pandemic, but there is promise.
“We anticipate that M&A activity will continue to be strong, particularly with add-on transactions that can be funded without new debt,” Konen said. “We also expect that buyers will be more willing to obtain new debt toward the end of 2023, as they have had time to adjust to the new market conditions and want to complete deals prior to year-end.
“While many of the national trends you read about are focused more on large M&A transactions in the public space, Omaha is known for its vibrant mid-market businesses involving small to mid-sized companies. Private mid-market transactions have the benefit of being streamlined and efficient, with more flexibility to find a workable path forward when issues arise.”
Herdzina noted that signs are pointing to a continued positive upward growth trajectory in M&A activity, but a few important factors are at play.
“We do expect activity to continue to increase due to the combination of aging owners, uncertain economic conditions and an increased desire to work for yourself,” he said. “We also see strategic acquisitions increasing as a way to grow and capture additional market share and talented employees which are challenging to find and hire today. As more awareness continues to get to the owners about exiting their business, we feel this will help them have their businesses more sellable.”
Grote agreed that the remainder of 2023 looks bright, but said beyond that, it is looking promising.
“We believe M&A activity will increase slightly in the last quarter of 2023, but is poised to accelerate dramatically in 2024,” he said. “Sellers have had time to digest lower business valuations, while buyers have adjusted their pricing models to reflect lower leverage and higher interest rates. Activity has remained brisk in smaller tuck-in deals.”
Belluomini is also anticipating what the future holds for the world of mergers and acquisitions.
“We are at the start of the largest wealth transfer in American history as baby boomers move wealth to Gen X/Y,” he explained. “Likewise, many financial advisers are within five years of the age of their clients; therefore, we expect a bull market for wealth management M&A to continue for the next 10 to 15 years.”
Nebraska is attractive to buyers as many businesses here have a proven track record with an established customer base.
“There are many companies with simple but strong business models around Omaha and in Nebraska,” Lehl said. “A few deals we are involved with here are in recession-proof, stable industries that draw strong interest. Institutional investors have to deploy capital, so they are always looking for a solid deal. Being out here in Nebraska can be a good hunting ground for buyers, as this part of the country sometimes gets overlooked.”