There are two basic types of business buyers (for mid and large businesses):
- Financial buyers such as Private Equity Groups (PEGS) and
- Strategic buyers such as similar companies or competitors
The PEGS are still active – many of them have raised their funds and are trying hard to deploy them in acquisitions. But the PEGs usually use a healthy amount of debt in order to leverage their cash and boost their return on investment, and the ability to raise debt is harder than it used to be for the same amount of assets and/or cash flow.
So the number of acquisitions by PEGS has decreased, while the number of acquisitions by strategic buyers has increased. In the
Why is corporate M&A up?
Although corporate profits are down, their balance sheets are healthy and companies in general have plenty of cash. Because companies typically use mostly cash or stock to make their strategic acquisitions and avoid the use of extreme leverage, corporations making deals haven’t been significantly affected by the difficulty of getting debt. In addition, a pause in rapid growth allows companies to execute on strategic plans that have been dormant for lack of human resources. In other words, companies now have time to fill holes in their service offerings and patch up product lines. Moreover, companies are currently enjoying less competition from the PEGS, both in terms of price and ability to move fast.
Indeed, we have an acquisition we have been working on where the private equity group’s offer is short on cash because they fear they will not be able to raise much cash using bank financing. The other parts of the offer (seller carry and earnout) are more than adequate, but without enough cash up front it is making the deal harder to get done.
In the end, both corporations and PEGs are out there trying to purchase businesses, but the pendulum has swung towards the strategic sale in terms of the deals that actually get done.