The ACG Capital Connection 2013 scheduled to take place April 9 at Vancouver’s Four Seasons Hotel will focus on deal-making in the middle market, which consists of companies with revenue between $10 million and $250 million and is a key driver of B.C.’s economy. It’s a good time, therefore, to check in with two of the speakers at the conference to discuss the current state of mergers and acquisitions (M&A) in that market.
Charles Addison is senior vice-president at MNP Corporate Finance and advises companies on exit strategies, acquisitions and growth. Curtis Johansson is director of CAI Capital Management Co., a private equity firm based out of Vancouver.
What are middle market companies doing to grow?
Addison: We are seeing companies in various industries taking advantage of the “exit strategy” shift that is taking place as owners consider what to do with their companies if an obvious succession plan is not available. Business owners are considering who they may know in their industry that is getting close to “retirement” and are seeing if they have an interest in selling. This may lead to some consolidation with industry groups within a geographic region. This isn’t just applicable to larger businesses but also applies to smaller businesses too.
Johansson: Companies are pursuing growth in a number of different ways. For example, Canadian companies that manufacture products for the energy sector are, broadly speaking, seeing limited growth opportunities in the Canadian market. As such, many are seeking international markets for their products. In another example, companies with an appetite for acquisitions and available capital have taken advantage of the economic downturn to consolidate their market and are now well positioned to benefit from the pending recovery in the global economy. When organic growth isn’t available, companies often turn to growth by acquisition.
What’s the level of mid- market M&A activity?
Addison: The market is quite active as capital is available and the demographics of the baby boom bubble are causing the owners of companies to think practically of how much longer they want to be running their company. While capital is available and there are a number of transactions, the uncertainty in the international markets keeps people somewhat cautious in completing transactions in the private market. Doing proper due diligence is essential so a purchaser can fully understand the impact of a transaction.
Johansson: The mid-market has weathered the storm quite well. Earnings are growing year over year in many sectors, and while some uncertainty remains, I would characterize the mood as resilient. There is also plenty of capital available, both equity and debt, to well-performing mid-market businesses in both Canada and the U.S.
What’s your forecast for the mid-market?
Addison: The outlook remains good for the mid-market. There is capital available and many opportunities. The shift in technology has led to both the demand for new products and the ability of firms to apply new technology to make products faster and more efficiently. The practicality of an aging population will lead to more businesses for sale and an opportunity for many to bring other ideas or energy to particular industries.
Johansson: I expect mid-market business performance to continue to improve, particularly as the U.S. economy rebounds. With respect to deal flow, the fact that the mid-market is generally doing well has not gone unnoticed. A number of private equity firms that have traditionally focused on investments in larger businesses have recently moved down-market because they see more attractive opportunities. In addition, strategic buyers that are struggling to find growth organically are seeking suitable target companies to bolt on to their existing operations. Often these are mid-market companies. As such, interest in good mid-market businesses is high, and I expect deal-flow to be robust for the foreseeable future.
It will be another five years before we are fully through the overhang from the 2008 economic crash.
At some point, corporate cash sitting on the sidelines will start coming back into the market, probably driven by the strengthening in the U.S. economy. Mid-market companies should be aware of this when it starts to happen because this will eventually lead to a rise in rates and pressure on those companies holding inefficient capital.
The ACG Capital Connection will bring together advisers, entrepreneurs, private equity and other capital providers to discuss deal making in the middle market. You can find out more about the conference at www.acg.org/vancouver.
