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Solid state: M&A activity expected to keep pace in 2019

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As long as baby boomers continue selling their businesses to take advantage of an attractive market, mergers and acquisitions activity will remain strong through at least the first half of 2019, several industry experts noted.

“Our expectation for 2019 is to continue the upward trend we have seen in the last several years,” said Ryan P. Hurst, a partner in the business consulting services group at professional services firm RKL LLP. “Things continue to feel pretty robust. Now, how long can things continue? The first half is pretty strong.”

National and international headwinds – from trade disputes with China to any hangover from the government shutdown – will create concern, Hurst and others said. But the overall strong economy and rising but still favorable interest rates will continue to induce sellers to enter the market, where an abundance of cash has been available.

“We’re still bullish on the marketplace,” said Robert J McCormack, of Murphy McCormack Capital Advisors in Lewisburg. The long expansion after the Great Recession has a lot of people thinking that now might be a good time to sell before there is an inevitable downturn, he said.

In Pennsylvania and the Lehigh Valley, the market has been particularly strong as baby boomers who started companies are now looking to retire, a trend that started a few years ago, McCormack and Hurst said.

“They are thinking ‘Now is going to be about as good as it is going to get,’” Hurst said about the thought process. “‘We might want to get off the sidelines.’”

“The markets have been flush with cash for years,” he added. “Buyers still have plenty of capital out there.”

Health care still big

The M&A boom has played out in the health care industry in recent years, with health systems and hospitals merging to create massive enterprises. While many large consolidations were inked in previous years, those health systems will continue to buy medical practices, elder-care facilities and other support companies this year and beyond, the experts predicted.

“With health care, a lot of the large consolidation has already happened,” said Colin J. Keefe, chair of the mergers and acquisitions group of Fitzpatrick Lentz and Bubba, a law firm based in the Lehigh Valley. Mergers involving elder-care facilities seem particularly strong, he suggested.

As far as overall activity, Keefe said, 2018 will be hard to beat because it was such a strong year. He expects 2019 to be good. “Just not as good as 2018,” he said.

“But I can say from our perspective that the first half of 2019 is very strong,” he added. “I would guess that the first half will be stronger than the second half, with the emphasis on ‘guess.’”

Notes of caution

The government shutdown for most of January could hinder the year’s overall numbers, Keefe said. Any deals that required federal government approval were placed in limbo during the long shutdown, which could hurt 2019’s overall numbers, he suggested.

Thomas W. Kerchner, managing director of BMI Mergers and Acquisitions, which has offices in the Lehigh Valley, Philadelphia region and elsewhere, said two of his deals were affected by the shutdown, but he expects the transactions to go through.

“In the merger and acquisition business, delays can kill deals,” Kerchner said. “But we think we will be OK.”

Kerchner said he, too, has heard concerns about the headwinds on the economy, which is affecting confidence in the deal-making market.

“I guess you would call it apprehension,” he said, with some people merely expecting the long growth cycle to come to an eventual end. “But even if there is a recession, we are not talking about a 2008 recession. It will be much more mild.”

“It’s the uncertainty that is affecting things,” Kerchner added.

Be prepared

Several experts said the market for deals is so strong that companies should prepare, even if they don’t currently intend to sell. A suitor could come along and make a compelling offer, Hurst said.

“Run your business as if it is for sale, even if it is not,” he said. “You never know.”

Business owners often make the mistake of not being prepared or holding off on investments that would keep their companies relevant and healthy, which could undercut sales momentum at exactly the wrong time. They also should make sure the books are in “good, clean order and easily understandable without a lot of noise,” Hurst said.

For example, he said, is a company focused on maximum profit or too focused on tax avoidance? Buyers would be wise to make sure they have a clear picture for their own strategic plans and stick to it, while ensuring they have a clear understanding of what they are buying and why.

“Do your homework, and don’t cut corners on due diligence,” he said.

Andrew Kahn, a shareholder with Concannon, Miller & Co. PC in Bethlehem, said reports have shown that 80 percent of the deals that are listed for sale don’t go through. Many reasons are behind that statistic but primarily it is because businesses haven’t ensured two critical elements: that the business is attractive to buyers and the owners are ready to transition.

Deals fall through, he said, because “that combination of attractiveness and readiness is not there.”

Other statistics, however, continue to indicate a strong market. About 4.5 million privately owned businesses are run by baby boomers. The value of those business is $10 trillion, he said, with an average age of owners set at 63.

“In general, these people start to truly look for an exit once they reach 67 or 68,” Kahn said, “unless someone comes along earlier with an offer that is too good to turn down.”

Kahn said the current headwinds aren’t strong enough to derail that momentum.

“I tend to think that it likely will continue,” he said. “I am not sure if the pace will slow, but there are still a lot of people who want to invest their money.”

One mistake owners make is that they don’t prepare themselves mentally for the next steps after they sell a company, leading to about 75 percent of them saying a year afterward that they regret the sale, he said.

Owners will get a big cash payment for a company that took them decades to build, then stay on as a consultant for six months to a year, only to find out that they are no longer needed, Kahn cautioned.

That eventuality needs to be thought about well in advance of a sale, he said.

“You need to plan what to do afterward,” Kahn said.

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