M&A market conditions are as strong as ever. Strategic acquirers and private equity firms have substantial sums of money to spend, market valuations are at historical highs, and the global economy continues to be healthy.
In fact, global M&A has had its strongest start ever in 2018. From January to the end of May, transactions totaled more than $2 trillion in value, according to Thomson Reuters. The value of global M&A deals increased 67 percent year-over-year in the first quarter of 2018.
Amidst all this activity, strategic acquirers are playing a leading role. Of the $2 trillion in global deals, U.S. private equity firms completed 1,101 deals, totaling $88.8 billion in deal value, according to PitchBook. The remainder—worth more than $1 trillion—were executed by strategic acquirers.
“Strategic acquirers usually plan to achieve synergies when they acquire a company, so they should be able to pay more,” says Tim Webb, a managing director with Harris Williams' Industrials Group. “Through synergies, they are able to extract some incremental value that financial buyers can’t bring to the table.”
The two biggest drivers fueling strategic activity today are the need for growth, coupled with large corporations’ ability to pay for it. “There is only so much organic growth to be had in certain markets. To deliver attractive growth to shareholders, companies often need to buy it. Companies have significant cash balances, which is often being helped by the repatriation of foreign cash. In fact, among the S&P 500, corporate cash balances are near all-time highs,” says Webb.
The M&A boom among strategic acquirers crosses industries. “We are seeing healthy strategic activity across the board,” says Webb, adding that some sectors naturally lend themselves more to strategic interest, including certain industrial businesses. For example, Harris Williams recently facilitated the acquisition of EP Minerals by U.S. Silica after a very competitive process involving only strategic buyers. U.S. Silica (NYSE: SLCA), a producer of industrial minerals, purchased the company for $750 million.
EP Minerals’ products are used in the production of beer and wine, as fillers for materials like paint, and as absorbent materials. “EP Minerals has a very diversified platform, which was appealing to buyers. They also have technology and new products, which is helping them drive growth at a higher rate. This company was really appealing to strategic acquirers looking to grow in a variety of channels,” says Webb. “The deal helped U.S. Silica strengthen its industrial offering and diversify away from oil and gas.”
Like U.S. Silica, many strategic acquirers are looking for businesses that will help them grow their leadership position. Some strategic acquirers want to purchase companies that will complement their business so they can cross-sell products or sell more products through their established channels. Others are looking to consolidate and gain market share.
As Webb explains, strategic acquirers bring certain advantages when evaluating new opportunities. “They typically have an inherent understanding of the businesses they are buying and industry dynamics. That gives them an advantage when it comes to diligence and when dealing with any potential market cyclicality, because chances are they have been through the same cycles.”
Additionally, there are some misconceptions about completing deals with strategic acquirers. For example, not all strategic acquirers will push out management, as is sometimes the perception of management teams. “Strategics are looking for talent. It could mean new roles, but it doesn’t mean that management won’t have a place in the new organization. Strategics also have a longer-term mentality, which can be exciting. For instance, they might be more willing to make capital investments in the business that have a longer payback period,” says Webb.
Going forward, Webb expects market conditions to remain healthy and the balance between private equity and strategic acquirers to be consistent with what he is seeing in today’s environment. “CEOs feel good about things. Because they have confidence, they will continue to be a driving force in the M&A marketplace,” he says.
Published August 2018