Mergers and acquisitions should remain strong through 2021 — driven by several factors affecting deal flow — although finding a good deal may come with a high price for buyers. Participants in a recent MiBiz M&A roundtable discussion say they expect valuations to stay high for the foreseeable future — perhaps unreasonably so at times — as buyers compete for good deals in a robust market. A massive capital overhang, low interest rates, and greater competition among buyers in the market drove up high valuations in 2020. Buyers ranged from strategic corporate acquirers seeking to drive growth or add to platform companies, to private equity investors and family offices. Lower deal flow after the U.S. economy fell into recession in the COVID-19 pandemic also contributed to increasing valuations that are expected to remain elevated even as activity picks up.
Jeff Helminski’s private equity firm has an internal goal of sourcing 20 qualified deals each week.
While those efforts slowed significantly during May, June and July as a result of the COVID-19 pandemic, Helminski — managing partner at Auxo Investment Partners — said his team is now at around 98 percent of that goal year-to-date, highlighting the recent surge in deal flow across a variety of industries that’s being seen nationally.
When looking at companies that are selling right now, Helminski lumps them into four categories.
The first is owners trying to exit manufacturing companies before the long-term effects of COVID become permanent within the business, dragging down the company’s appeal and value. Another segment of sellers are manufacturers that have seen a bump in sales because of COVID and are trying to capitalize on that short-term surge.A third group of sellers is looking to close on a deal before the end of the year out of concern of changes to the tax code under a potential Biden administration. The fourth category is simply the natural, ambient level of deals, including those that involve owners reaching retirement age. The fourth category of deals moved through the pandemic mostly unhindered, Helminski said.
The COVID-19 pandemic that dismantled daily routines and hammered the economy has forced investors to pivot along with the companies they back financially. As firms work through the pandemic and guide their portfolio companies, constant communication has taken on greater importance, particularly at a time when people are working with heightened anxiety about their safety and uncertainty about the future, said Jack Kolodny, a managing partner at Auxo. Auxo holds regular meetings with portfolio companies, which allows them to share information and best practices for employee safety, cleaning facilities, and ensuring “the messages are getting down to the operators so that everybody understands what’s going on with the company, with the world, and with the policies,” said Chris Merendino, a Vice President at Auxo.
The team at Grand Rapids-based private equity firm Auxo Investment Partners has a saying that every deal has to die once before it closes. “That tends to be the way these things work — you often come across things that look like they could be deal killers and you just have to find a way to work through them,” said Jeff Helminski, managing partner of Auxo, which invests in growing founder- and family-owned industrial, manufacturing and business-services companies. Helminski and his team at Auxo encountered plenty of those instances in its 2020 acquisition of Indianapolis-based Precision Parts Group Inc. Precision Parts Group’s two divisions included Paramount Tube, which manufactures highly engineered and custom small diameter spiral-wound and extruded tubular products, and Euclid Medical Products, which manufacturers single- and multi-dose pharmaceutical packing systems.
M&A activity that declined sharply in the second quarter as the COVID-19 pandemic took hold and slammed the economy appears to have started rebounding after mid-year. Private equity activity in particular picked up in the third quarter as firms resumed investing after a temporary halt because of the pandemic, said Tracy Larsen, co-chair of the Mergers and Acquisitions practice group at Detroit-based Honigman LLP and managing partner of the Grand Rapids office.
M&A professionals expect the dealmaking market to remain healthy in 2019. That’s one of the conclusions from a panel of executives MiBiz assembled to talk about West Michigan’s mergers and acquisitions sector.
How has the M&A landscape held up in 2018 and what do you see going on in 2019?
Helminski: It's been really, really busy for us. We’re on track to see about 600 qualified deals (in 2018), if the last couple of weeks hold up about right...