2018 was an exceptional year for M&A activity. But how will trade wars, volatile markets, political tensions, and an unpredictable world affect things in 2019? Here are five trends that are likely to drive domestic M&A for the next year.
High Liquidity Despite Higher Interest Rates
People are willing to be aggressive because their need to deploy capital outranks their desire to be conservative. In a low growth environment, many businesses are seeking to grow via acquisition. Last year’s tax changes are mostly favorable to corporations, promoting more liquidity. Rising interest rates could eventually affect the returns on a financed investment, but there’s unlikely to be a significant decline in the middle market.
A Demographic Trend Toward M&A
The population is aging. Many corporations are led by Baby Boomers who are nearing retirement. One recent survey found that 77% of owners of companies with values between $5 million and $250 million plan to transition away from their companies within the next decade. Another survey found that nearly half of owners have considered selling to private equity.
Many companies are increasingly getting inbound solicitations. As survivors of the financial crisis, they’re naturally skittish. They don’t want to run their companies for another decade or weather another economic storm. As they move to get out, more companies will come onto the market.
Healthy M&A Activity Across All Sectors
Innovation-driven sectors such as healthcare and technology are experiencing a surge in M&A activity. This is thanks in large part to the role of industry disruptors. These industries are changing, and M&A is often driven by a desire to remain ahead of the change curve.
The current economic climate across sectors favors scale. Supply chains are consolidating along with customers. Businesses are asking themselves how this will affect their competitive position. Many are moving toward a sale.
Trade Wars Could Affect Valuation
The impact of trade wars and tariffs varies and is highly industry specific. Most companies are paying more attention to the potential for higher costs and lower margins. Input costs are beginning to increase, and owners are growing concerned. This could eventually affect valuations. The ultimate effect this has on the M&A market is less clear.
Tax Reform Has Generally Been Positive for M&A
At the beginning of 2018, analysts hotly debated the effect that new interest deduction rules would have on M&A activity. We are still seeing high leverage levels, especially on growing businesses with high margins. Tax reform has produced overall positive outcomes for the M&A market.
This year should be a good one for M&A. The middle market, in particular, will likely see steady growth. So if you’re looking to sell, consider making the leap now. Economies don’t remain strong forever.