Auto, Manufacturing Led Aggressive M&A Market; PE Flexed its Muscles
Originally Published: January 25, 2015 8:00 AM Modified: January 29, 2015 12:47 PM
Big deals of 2014: ‘A fantastic year’
Auto, manufacturing led aggressive M&A market; PE flexed its muscles
If 2009 was the perfect storm for mergers and acquisitions, then 2014 was a day at the beach, watching a double rainbow with a mint julep on the way.
Sure, there was $80.9 billion in deal value in 2009, but all save $4.3 billion of that was tied to bankruptcy or government bailout acquisitions.
The 113 deals completed in 2014 came to nearly $44 billion, and there were very few distress deals among them. Instead, the market had a very large appetite for auto-related and manufacturing companies. Half of the deals — 56 — and $28.5 billion of value were in those sectors.
“It’s a beautiful world. It was a fantastic year,” said Michael DuBay, the group practice leader for private equity for the Detroit-based law firm Honigman Miller Schwartz and Cohn, which does a national M&A practice.
He said the firm is still tallying the deal totals it advised last year, but the number of transactions was more than 100 and could hit a deal value of up to $10 billion, compared to $8.2 billion in 2013. About half of that was in Michigan.
“Everybody was in the game — U.S. and foreign strategic buyers, private equity firms and banks,” he said.
Private equity was a particularly strong force. PE firms raise funds from limited partners with time constraints for deploying the funds and harvesting portfolio companies.
Funds that were raised during or immediately after the recession tended to hold off on doing deals, meaning they have an added incentive to do them now, said Aaron Witalec, director of UHY Corporate Finance in Detroit.
The result is, he said, PE firms now are happy to do deals for companies at the lower end of the middle market that they once have viewed as too down-market.
“In the past, they might only have done deals for companies with $10 million in EBITDA (earnings before interest, taxes, depreciation and amortization). Now, we’re seeing private equity companies focusing on companies with EBITDA of $1 (million), $2 (million) or $3 million. And that lower end of the middle market is the bread and butter of Michigan companies,” Witalec said.
Crain’s has been tracking big deals since 1996, and neither the deal nor dollar numbers in 2014 were a record, but they were by far the best totals since the recession started in 2008. The record for deals, 152, was set in 1998. And 2009’s record deal volume was driven largely by nearly $68 billion related to the U.S. government bailout of General Motors and Chrysler.
The story of 2014 was the display of health by the automotive industry and manufacturing generally.
The largest deal, by far, was the pending acquisition of Livonia-based TRW Holdings Group Inc. for $12.4 billion by ZF Friedrichshafen AG, with the second-largest the $4.35 billion deal by Fiat SpA of Italy for FCA US LLC of Auburn Hills, better known as Chrysler.
“Auto is back with a vengeance,” said Phil Gilbert, managing director of P&M Corporate Finance LLC, an affiliate of the accounting firm of Southfield-based Plante & Moran PLLC.
“It was a very robust market last year, and the pipeline remains full,” said Tony Blanchard, managing director of the Detroit office of Deloitte Corporate Finance LLC. He heads the firm’s auto and industrial M&A practice.
He credited the supply chain for “the leaning-out of costs and operational improvements” during and after the last down cycle, as well as “great financial performance in general” for helping drive deal flow in 2014.
It was a deal flow also helped in large measure by the eager return by private equity to a sector left for dead in 2009. They had questions about future down cycles but were impressed by the answers.
“Every deal we took to market, buyers asked about down-cycle performance, but companies had the ability to show they were able to turn off costs, improve balance sheets and ride out the storm,” said Blanchard.
He predicted the 2015 pipeline would be helped by acquiring companies in 2014 now looking to carve out nonessential assets, and by cross-border activity, particularly Asian companies eager to get into what is again one of the world’s best auto markets and best economies.
“The deep flush in 2009 wiped out all the excess capacity in auto. An unbalanced relationship between suppliers and customers that had existed for 20 years got back in balance in one flush,” said Cliff Roesler, a partner in Birmingham-based Angle Advisors-Investment Banking LLC.
Angle had a record year with 17 deals out of the Birmingham office worth $1.4 billion last year, and another eight deals for about $540 million out of the German office. It did four deals for more than $100 million, including its two biggest deals since being founded in 2010, said Roesler.
There is broad consensus that 2015 will continue to be part of an era M&A professionals will long remember as the good old days.
“The pace in 2015 will be as strong as or stronger than it was in 2014,” said Rajesh Kothari, managing director of Southfield-based investment banking and venture-capital firm Cascade Partners LLC.
“We’re very positive for 2015. I’ve been in this business for 27 years, and I’ve never seen a better time to sell or buy,” said Andre Augier, managing director of Birmingham-based investment banking firm Quarton Partners LLC.
Local M&A professionals think any interest rate increases by the U.S. Federal Reserve Bank will be late enough in the year and small enough to have little impact on deal flow, and despite the high level of activity in 2014, they don’t see the signs of irrational exuberance they were seeing in 2006 and 2007 that could lead to a bursting bubble.
“Valuations are higher than I’ve ever seen them, and I’ve been doing this for 18 years,” said Kothari. Deals that would have gone for a multiple of five or six times EBITDA two or three years ago are now fetching multiples of seven, eight or more.
Despite high valuations, Kothari sees little chance of things overheating in 2015.
“People are more measured and far more methodical. There isn’t the frenzy there was then in 2006 and 2007,” he said. “You couldn’t identify the thought process behind a lot of deals, then. People were doing crazy things. Now, you understand why people are doing deals.”
“We’re projecting pretty favorable tail winds for the next 24-36 months. I don’t see anything major happening before 2017,” said Gilbert.
“The only thing that can cool this white-hot market is a significant increase in interest rates, and there’s little chance of that,” said Augier.
Interestingly enough, Augier credited a long, mediocre national economic recovery for making his industry so dynamic last year. He said clients who survived the recession rebuilt their profit margins and their cash reserves but nonetheless found stalled organic growth, which led to growth through acquisition.
“There’s a lot of money still chasing deals,” said DuBay. “If you have a good company, someone will buy it.”