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Private Equity: Potential Merger & Acquisition Trends for 2017

Nixon Peabody hosted a roundtable discussion on Trends & Opportunities in Private Equity and M&A on Wednesday, January 25. Panelists for the event included:

  • Brad Adams, Managing Director at TM Capital Corp.;
  • Peter Arcoma, Director, Transaction Advisory Services at RSM US LLP;
  • Wade Aust, Managing Director and Partner at Alantra;
  • Charlie Burckmyer, Principal at JMC Capital Partners;
  • Gray Chynoweth, Managing Member at 10X Venture Partners; and
  • Peter Connolly, Managing Director at Cobepa North America.

The discussion, moderated by Nixon Peabody partners Greg O’Shaughnessy and Andrew Share, covered panelists’ reflections on deal activity in 2016 and predictions as to what 2017 may have in store for M&A and PE. A summary of the panelists’ observations is as follows:

2016: High Valuations and Stiff Competition

• While overall transaction volume may have been down last year from what was observed in 2015, the panel noted that deal flow in the middle market remained strong. The market was highly competitive for buyers, which was driven by several factors. First, strategics with healthy balance sheets continued to seek opportunities to deploy cash reserves. These strategics’ advantage over financial buyers, whose capital may largely have been committed, remained apparent in 2016. Second, fierce competition persisted within the PE industry, with upper market funds occasionally looking at the lower ends of the market for quality assets and roll-up opportunities that were unavailable in the higher end of the market. And third, the market was ripe with active buyers from other regions—particularly Asia—who were winning deals and competing on price as well as any other U.S. buyers in many instances.

• Valuations remained high in 2016, with some industries like aerospace and packaging seeing double digit EBITDA multiples. As a result, PE funds that closed transactions with inflated valuations took the risk of underwriting deals for lower returns. The panel noted, however, that buyers have become more discerning in recent quarters. This has led to the dichotomy of buyers aggressively seeking deals despite high valuations in some instances, while walking away from deals in other cases if they conclude that a target is overpriced.

2017: America First?

• Uncertainty follows any presidential administration change, and the results of the 2016 presidential election are no different. The panelists’ consensus was that President Trump will likely be good for M&A deal flow, though this is far from a sure thing. Concerns include the president’s propensity to publicly chastise manufacturers, which could lead to margin pressure and cause downward valuations. Similarly, President Trump’s “America First” mindset could dampen cross-boarder M&A activity by causing foreign investors to think twice before investing in a U.S. company or moving jobs or production overseas. Companies with operations in Mexico also have reason to be concerned about his proposed increase in tariffs on Mexican goods and whether these costs can be passed on to consumers.

Nonetheless, panelists agreed that Trump’s pro-U.S. economic policy could be a tailwind that could lead to more sustained American manufacturing jobs. His focus on infrastructure improvements could also positively impact the equipment, engineering and procurement sectors.

• The concept of “rural sourcing”—relocating tech and support positions to rural America rather than outsourcing the same positions to countries like India or the Philippines—may continue to proliferate in 2017, particularly as a result of the new administration’s economic policy. Panelists noted that not only could this strategy lead to positive public relations coverage for companies who keep jobs in the U.S., but also that this approach may make economic sense in light of dramatic increases in employee salaries in many foreign locations where jobs have historically been outsourced.

• Finally, the panel touched on their understanding of the future of the Affordable Care Act, and how this may affect transactions. Panelists opined that the impact of a repeal of the ACA would be negative throughout the health care industry, though not as negative as when the ACA was initially enacted. Sectors where regulation under the ACA is currently light, such as outsourced IT services, will likely remain unchanged in the event of a repeal or replace. But the proposed repeal of the ACA would be a boon for insurance companies; the industry’s stock is up sharply in comparison to the S&P Index.

chris-bergenChris Bergen is an attorney with a Nixon Peabody corporate practice that includes the representation of private equity funds, portfolio companies and venture capital investors. Read more Nixon Peabody blogs here.

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