The capital gains tax rate, now at 15%, is expected to increase – only the amount of the increase will be determined by who gets elected this November. Baby boomers are now starting to retire and over the next decade will be selling off the businesses they created. Companies that were waiting on the sidelines are becoming active in looking for strategic acquisitions, taking advantage of the lull in the market to fill holes in their strategic plans.
What does this all mean? A healthy M&A market for mid-sized companies and an expected increase in acquisition activity. Indeed, the next six month period looks quite busy for us in regards to closing deals. Quite simply, if you have a stable or growing company, there are buyers.
Has the turmoil in the financial markets affected the M&A market? Yes, it is more difficult to get financing, so those deals on the edge that need extra financing are having a tough time getting through to a close. However, financing for solid deals is there, and always will be.
Has the troubled economy affected the M&A market? Yes, there are more companies that are not doing well (see my last blog entry), and many of these companies are having a tough time selling their companies in this market. However, for stable and growing companies the market is good and solid.
The other area that this financing market affects is the private equity groups. They traditionally use a healthy amount of debt in order to increase their own rate of return, so many of them have to deploy more cash in their deals. I was personally uncomfortable with the amount of debt that many of them would use, so forcing the industry to use a nominal amount of debt isn’t such a bad thing. But it can affect how much a private equity group offers for a company.