Looking to buy a company? Prepare to accept the seller’s terms. The world of mergers and acquisitions is experiencing a strong seller’s market.
That’s been true since around 2003. In that year, strategic buyers—companies buying other firms, usually in the same or related industries—were ready to pursue acquisitions again after surviving the recent recession. Private equity firms—companies that raise money from investors, buy other companies, improve them, and resell them at a profit—had money from funds raised between 2000 and 2003 that they needed to put to work.
Since then, strategic buyers have shown continuing economic strength, and private equity firms have raised—and invested—record amounts of money. The result is a steady annual increase in the number and value of U.S. mergers and acquisitions deals. In 2004, 8,584 U.S. transactions generated $811 billion. In 2005, there were 9,235 announced deals, worth a total of $1.153 trillion. That dollar value increased by 35.7 percent in 2006, when $1.565 trillion fueled 10,433 announced deals. (Data is from Thomson Financial Corporation, a New York–based company that analyzes mergers and acquisitions information.)
I think there are more surprises today, because the process is getting compressed. There is a risk . . . that a buyer won't be as knowledgeable about a company's warts as they would have been five years ago.
Clearly, buyers want to buy—particularly profitable, well-run companies. “There is so much money chasing a limited number of deals,” says Sima Griffith, founder and managing principal at Minneapolis-based private investment bank Aethlon Capital, LLC.
The imbalance has created a strong sellers’ market—so strong, in fact, that it’s changing the procedure by which companies are sold. Auctions, which tend to create high selling prices and seller-friendly deal terms, are gaining prevalence. “Auctions are much more common now than they were three years ago,” says Frank Bennett, partner and chairperson of the corporate finance and mergers and acquisitions group at the Minneapolis-based law firm Lindquist & Vennum.
