Oh, boy, even Oberto! – Record First Half M&A

by Aug 29, 2018

PNWA Corporate Finance Managing Director Jeff Hoyt (jeff.hoyt@pnwa.com) reports U.S. deal volume hit $2.5 trillion plus through June. According to Mergers & Acquisitions magazine, he added, every industry sector showed strong growth. The driving force is a torrent of capital looking for work and still-favorable interest rates. Acquisitions spending still dwarfs buybacks and new capital investment, despite their own rapid growth. Buying competitors or line extensions seems to be more profitable now than in-house investment. A Canadian private equity firm bought 100-year-old locally owned Oberto Foods.

First half M&A volume at record high
Jeff Hoyt, PNWA Managing Director – Corporate Finance

U.S. deal volume continues to expand with more than $2.5 trillion in announced deals through June according to Mergers & Acquisitions magazine. All sectors show strong growth including TMT, manufacturing, healthcare and services. Consumer product companies continue to attract attention from both strategic buyers looking to bolster top line growth and private equity investors looking to acquire stable cash flow streams. Longtime local icon Oberto Foods announced their sale to a Canadian private equity group this spring ending almost a century of local ownership. Midsize public defense/aerospace contractor Esterline announced that they were considering “strategic” alternatives and saw almost a 10% pop in their stock price.

Driving all this activity is a torrent of capital available and looking to be put to work. Big-cap US corporates have the potential to repatriate over $1.5 trillion at reduced tax rates because of the tax changes passed last year and they are not spending all the funds on stock buybacks. Interest rates remain very favorable despite two Fed rate hikes and the potential for two more by years end. Yields on the 10 year are up 50 basis points but remain under 3%.

For many large-cap names the challenge they face is balancing investor demands to return capital either through dividends or share buybacks and government jawboning to invest in job producing facilities. In many cases it appears that investing in acquiring smaller competitor, companies and/or products is more lucrative than creating products and businesses from scratch. Announced buybacks will likely total more than $600 billion and capital expenditures are growing at a double-digit rate year over year thus far in 2018. Both of which are dwarfed by the amount spent for acquisitions.

According to the Pepperdine private capital markets project, the median small cap EBITDA multiple was 5.5X in the 2nd quarter. The median price to sales multiple was 1.0 times. Both reflect strong demand from buyers at reasonable prices paid to sellers (jeffhoyt@pnwa.com).