Source: Fifth Third Bank.
Availability of liquidity.
These are merely a few of the factors that drove a record number of merger and acquisition (M&A) deals in 2017.
And due to the large amount of capital available and recent changes in tax law, 2018 could very well be another record-breaking year: Almost 70 percent of executives at U.S.-headquartered corporations and a full 76 percent of leaders at domestic-based private equity firms expect M&A activity to increase over the next 12 months, according to a recent Deloitte report.
That is, if companies are willing to sell.
A strong economy can be a double-edged sword for buyers. Premium companies well-positioned for healthy deals may be less inclined to sell when experiencing a high-profit and growth period.
“It’s a very interesting dynamic,” says Rob Schipper, Managing Director and Head of Investment Banking at Fifth Third. “There is a huge liquidity wall that want to buy these companies, but we don’t have enough supply of quality companies to satisfy that demand.”
This supply-demand imbalance trend affects the M&A landscape as a whole, and even more so in specific verticals. Buyers in the private and public sector are focused on companies with specialized experience in retail, healthcare or manufacturing; but each industry has its own set of factors driving activity.
There’s no denying that Amazon has drastically uprooted the retail landscape. “The ‘Amazoning’ of the world has changed how every retailer has to look at their business,” Schipper says.
For most consumers, shopping locally has become less of a priority. Speed and convenience reign supreme. “There is a place for brick and mortar as part of the ecosystem,” Schipper says, “But you also need an online or virtual shopping experience to remain competitive.”
For retail companies that want to appear attractive to buyers, a fully integrated online strategy is imperative. Consumers have come to expect an omni-channel experience, Schipper says. He recommends retail companies seeking an exit via a merger or acquisition double down on investing in their online experience first.
Retail businesses, he adds, need to stay dialed into how quickly the landscape is changing — and be prepared to pivot quickly to keep up. This may entail a complete business model transformation to remain competitive.
The good news? This presents a massive opportunity for retail businesses who can stay ahead of the curve.
“Historically, some of these transformations could take years, even decades,” says Schipper. “Today, that pace of change is so fast. Companies can harness these competitive dynamics and create a lot of opportunity in months.”
A confluence of trends have sparked rapid change across the entire healthcare vertical: An aging population drives increased demand for healthcare services. Massive regulatory policy initiatives such as the Affordable Care Act redistributes costs and increases demand for preventative services. Apps, software and other disruptive technology platforms change the dynamic of how patients receive care.
These trends are prompting healthcare-related companies to rethink and reinvent for how they go to market, says Schipper. It’s also leading buyers to embrace risk. As the status quo shifts, buyers bank on new investments to avoid getting left behind. The most desirable healthcare companies are those with unique business models that can offer cost savings—either for the patient, the healthcare practitioner or both.
Hospitals were once our primary source of care. Due to their high fixed cost, however, — which was then transferred to the patients — consumers now seek alternative options for care such as outpatient centers and specialty physician services. As patients seek healthcare services elsewhere, hospitals are beginning to merge to reduce expenses.
Virtual tools have also uprooted how we receive care. Now patients can text their doctor or receive a diagnosis via video chat. To treat minor illnesses, patients and doctors may never meet face-to-face. Forward-thinking companies with new solutions for connecting care providers and care seekers will be attractive in this landscape.
Industrial & Manufacturing
Another vertical upon which the rapid pace of change has had a massive impact on M&A activity is industrial and manufacturing—an area where the build versus buy mentality is more present than ever.
Companies that do not have the time to build out a proper expansion of their offerings or capabilities may choose to fast-track that expansion through a merger or acquisition. If you manufacture a product or solution that can accelerate growth for buyers, you’ll be well positioned for a merger or acquisition this year.
Slow U.S. economic growth is also impacting the demand for international presence. To grow significantly and cement their presence globally, companies need to expand their capabilities to other markets.
Of particular interest to buyers? Products that can be manufactured or distributed internationally.
Maintaining cost effective operations is another key to remaining competitive in a globalizing marketplace. Mike Burr, Managing Director and Head of M&A, believes companies that offer a specific solution to keeping costs low have an incredible advantage: Whether it’s a manufacturing apparatus that streamlines one aspect of an assembly line or a smart control that makes heating and cooling a factory more efficient, targeting one aspect of efficiency offers a leadership advantage.
Labor costs are another differentiating factor for industrial companies seeking an acquisition.
“Anything that’s able to take labor cost out of the manufacturing or distribution enterprise stands out,” says Burr. “Anything that has that capability to streamline labor will be highly desirable.”
Layered over all of these industry trends is an abundance of buyers and a dearth of quality sellers. Between the labor costs in manufacturing, innovation in healthcare and the competitive shifts in retail, there will be plenty of activity to keep buyers and sellers busy in the coming year.