Douglas S. Parker on Dykema’s M&A Survey
By Steve Thorpe
sthorpe@legalnews.com
Dykema’s 9th Annual Mergers & Acquisitions Outlook Survey was designed to measure how leading executives feel about the state of the economy and the future of the M&A market in the upcoming year. Douglas S. Parker of Dykema’s Bloomfield Hills office focuses primarily on mergers and acquisitions, public securities offerings, public company securities compliance and private placements of securities.
Thorpe: Tell us a bit about the methodology of the survey.
Parker: In mid-September, we distributed our annual M&A Survey via e-mail to a group of senior executives and advisors, including CEOs, CFOs and other company officers. Twenty-four percent of the 110 respondents identified themselves as company officers or executives, and 23 percent identified themselves as investment or commercial bankers. Industries represented included banking/financial services (23 percent), automotive (16 percent), nonautomotive manufacturing (15 percent), nonbanking business services (9 percent) and private equity (5 percent). This is the ninth year we have conducted the survey. Many of the questions have remained the same over the years in order to give us comparable results year to year. Other questions are tailored to reflect current events or trends. While most questions are multiple choice, some also ask respondents for explanations of their answers. Copies of our report on the results of the 2013 M&A Survey can be obtained by visiting www.dykema.com/mergers/.
Thorpe: In the executive summary of the survey, you say, “Those who live and breathe the M&A market see glimmers of hope.” Tell us about some of those hopeful signs.
Parker: We believe the most significant sign to be taken from the survey is the increased optimism respondents have for both the economy and the M&A market. As with many aspects of the economy, expectations can lead to reality. For both the economy in general and the M&A market in particular, we asked respondents two questions regarding their expectations for the next 12 months: How they perceived the strength of each in the next 12 months and how they expect the next 12 months will compare with the last. Regarding the economy, half of the respondents reported a positive outlook for the economy and slightly more (54 percent) believe it will improve as compared with the last 12 months. Similarly, 44 percent of respondents believe the M&A market will be strong during the next 12 months and 68 percent believe the M&A market will be stronger than it was during the last 12. Interestingly, this means up to 24 percent of respondents believe the market will improve but still not be “strong.” Nonetheless, these numbers are the most optimistic we have seen since 2005. Similarly, the percentages of respondents who see the economy or the M&A market getting worse or being weak were at the lowest levels ever reported in our survey, all less than 10 percent.
Thorpe: How accurate as a barometer for the economy in general is the M&A market?
Parker: It is likely that the strength of the economy and the M&A market move more or less in tandem. In terms of which is a barometer for the other, it is more likely that the economy moves first, followed by the M&A market. This is based more on general observation than the results of our survey, which is not really designed to tease out this information. Despite this generally parallel movement, there are factors that can have an effect on the M&A market that may not have a significant impact on the economy in general. A relatively recent example was the spike we saw in activity as 2012 was coming to a close as businesses and their owners wanted to get deals done before the new tax laws went into effect for 2013. Respondents also noted that external factors can have an effect on the M&A market such as foreign companies and individuals looking to invest capital in the U.S. Respondents suggested other factors that could have a positive effect on the M&A market and maybe not the economy in general, such as financial buyers feeling pressure to sell as funds get to be five to seven years old with little activity during that time and strategic buyers considering consolidation as a way to contain costs after exhausting most other alternatives.
Thorpe: In spite of the optimism, you also talk about “continued uneasiness.” What are some of the causes?
Parker: Based on some of the narrative responses we received, it is apparent there is a sense of uneasiness due to uncertainty, mostly relating to the political environment and actions, or inaction, on the part of the federal government. Businesses are very good at adapting to change whether the change is perceived as positive or negative. What they hate is uncertainty. The healthcare initiative is an interesting example as it was cited by respondents as creating uncertainty for business; however, one noted that as it is implemented, the uncertainty surrounding it is starting to fade and businesses are adjusting to how they believe it will work. The gridlock in Washington regarding budget matters and the debt ceiling were also cited as creating uncertainty that was causing some to sit on the M&A sidelines. Looking beyond our borders, the economic problems in Europe have been cited as creating uncertainty that has possibly slowed the pace of deal making but that was not raised as much this year as last.
Thorpe: The economy, and especially the government’s role in it, has been pretty chaotic this year. What influence has that had on M&A?
Parker: In response to our question about the most common obstacles to deals in the last 12 months, respondents cited uncertainty in the economy as number one last year and again this year, with a weighted ranking far exceeding the next most often cited reason (which was “availability of quality targets” this year and was “financing” last year). As noted above, based on narrative responses it appears that political and government-related matters account for a great deal of this economic uncertainty. These concerns can certainly have a chilling effect on the M&A market; however, eventually, businesses will be compelled to make deals as the pressure increases to use excess capital and take advantage of less expensive capital, especially if there is any expectation that interest rates might rise.
Thorpe: Can you contrast the current survey to the last one for us?
Parker: In addition to the differences noted above regarding improved expectations for the economy and the M&A market, respondents believe more strongly than last year that strategic U.S. buyers will increase their presence in the M&A market as opposed to financial U.S. buyers and foreign buyers. Also, when given choices regarding ways in which deals were structured differently during the last 12 months, the one most often cited was unitranche debt financing. Fifty-two percent of respondents saw this used more often in the last 12 months as compared with such alternatives as subordinated debt financing and increased equity requirements. Unitranche debt financing is a type of debt that combines senior and subordinated debt into one debt instrument with a single set of terms. This simplified form of financing is used primarily by middle-market borrowers and is viewed as simplifying acquisitions and hastening their completion.
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