My son is 19 and I figured it was time to teach him some “life lessons.” So, being a mergers and acquisition specialist, I turned to the recent market turmoil to teach him (and remind myself of) a valuable lesson: Don’t judge a market at any one point in time. Trends are made over time and always revert back to fundamentals.
To make my point, I put a stock chart in front of him that showed a stock falling from about $340 to $250 over a six-month period, and then asked him a simple question: “Do you think this is a good company?” Of course, he answered that it looked like a terrible company and commented that if I owned the stock, I must have lost a lot of money. I then told him the name of the well-known company and showed him the five-year stock chart where the price increased from $70 to over $250. With a smile on my face, I felt like I had made the point—the noise in the short term can often cloud the longer-term trend.
I get questioned every day about my opinion of what’s happening in the private M&A markets. People assume deals are failing and that market activity is drying up. After all, at this point in time, you can’t avoid the daily headlines of rising interest rates, rapid inflation, political instability, and volatile markets. Yes, public markets are going crazy. Yes, interest rates are going up. Yes, there’s uncertainty behind inflation. Yet many companies are making more money than they ever did before and unemployment is at the lowest level since they started tracking the statistic. How does someone make heads or tails of conditions like this?
To be clear, a recession is coming (and is likely already here), as they always do over time in a functioning market economy. Nothing can go up forever. This said, it’s important to remember the lesson of not getting too caught up at any single point in time, and to look at the longer-term trends of what drives private company M&A.
Prior to the pandemic, private company M&A was booming, driven by the baby boomer retirement wave, historically low interest rates, lots of available capital looking for good investments, and, of course, strong company growth. The decade leading into 2020 was indeed very good times in the private company M&A market. Then, in 2020, we were introduced to COVID-19, which had the result of artificially stopping the economy, globally, all at once. An experiment, so to speak, never tried before in the history of capitalism.
During this time, deals fell apart, deal processes were paused, and things felt bleak. Fast forward to 2021’s combination of lower interest rates, governments stimulus and pent up consumer demand: consumers (and markets) came back with a roar. Demand, combined with supply chain constraints, have allowed companies to increase prices and, in many cases, earn record profits. 2021 will also be tagged as the year many were blindly gleaming about their stock portfolios gains and how much their houses had increased in value. Now back to the roller coaster ride that is 2022 where the “R-word” is capturing daily headlines and it’s no wonder people are struggling to understand one question in particular: Is now a good time to buy or sell a business?
Well, to answer this question, it’s a matter of looking at the longer-term fundamentals that drive private company M&A. The number of baby boomer business owners has not changed, so there is a need for deals to happen. The amount of private capital targeting business acquisitions is at an all-time high, as is cash and credit capacity on corporate balance sheets. Interest rates, although rising, are still near their 20-year lows, so we remain in a relatively low cost and capital-abundant environment.
It’s hard to argue that the private M&A market fundamentals are not at a strong point in their mid- or long-term cycle so, in my opinion, it comes down to confidence in company performance. If investors and buyers are unable to understand sustainable earnings, they will have a hard time pricing businesses for transaction purposes. Inflation and lingering supply chain issues are blurring the view through the front wind shield, but it’s hard not to imagine that the windshield will clear-up within a quarter or two.
So, do I think the markets are terrible? It may feel off at a point in time, but, much like my investment in the well-known company I mentioned earlier, I am very bullish on the fundamentals and am doubling down and hiring for expansion!
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