H. Hiter Harris knows a lot about the middle market. He co-founded Harris Williams & Co., a leading middle market investment bank, in 1991. In 2005, PNC acquired Harris Williams but the Richmond, Va.-based IB has remained true to its middle market roots, advising on transactions valued at $1 billion or less.
This year, Harris Williams is seeing a boom in deals. The IB expects to advise on 70 transactions this year, up 40% from 2009. Harris, an MD with the firm, spoke to me by phone about the middle market and deals.
- We saw a lot of deals late this year in anticipation of changes to the Bush-era tax cuts. These will now be extended. Do you think we’ll still have many deals in 2011? Yes, there is no doubt that some of the deals getting done were tied to possible changes in December. For us, December will be a record month in [terms] of the number of closings. It’s been a busy year. But tax changes only funnel deal flow into this year. It didn’t change someone from not being seller into being seller. We are seeing a resurgence in mid-market deals. I think this will continue in 2011. It could be that, in early in 2011, we see a slight drop off in deal flow simply because everyone was working to get deals done by December.
- How are the debt markets doing? Right now in the middle market it’s going quite well. Liquidity and the number of participants have increased steadily through the year. We’re having no problems with middle market deals getting financed, and we think this will continue into 2011. Lenders have a fair amount of capital to get out. We’ve read how debt markets for bigger deals and small, private companies are at low supply, but in the middle market it’s at a solid level. It’s not back to where it was three years ago. But it doesn’t need to be. To have a thriving M&A market, you don’t need the debt market to be as extended as it was three years ago. You just need it to be vibrant and robust.
- What sectors do you think will be particularly active in 2011? Healthcare. I would put energy and power in there. And technology. Keep in mind those three categories are not mutually exclusive. An energy company like a smart grid company has a tech bent to it, as do healthcare IT companies. There is an awful lot of crossover. I would add consumer to that. A lot of people think consumer and residential real estate is lagging, but the consumer world is a lot more stable than people are giving it credit. It’s a very stable part of the market right now. We are seeing a lot of consumer deals.
- Are multiples back up from where they were during the crash? Multiples are surprisingly good. They’re not back to the level of three years ago but they’re not falling off. One of the dynamics of the cycle is that multiples didn’t drop. The volume of deals was very low and multiple measurement was difficult to [gauge]. Now that the market has picked up again, multiples have been very healthy again. Maybe half a turn from the top of cycle three years ago. One thing driving that is the pent up demand and supply for deals from corporations and private equity groups. Corporations have statistically more cash than they’ve ever had in their history. PE groups also have more cash than they’ve ever had in their history…There’ s a whole lot of dry powder. On the supply side, if you were interested in selling in 2008 or 2009, you were probably hesitant. You probably held off. In 2010, we saw some of that pent-up demand and supply meeting each other and that’s keeping multiples at sustainable levels.
- Can you give us some idea what the specific multiples are? Multiples really depend on the industry. Some at 7-8x while others are at 10 to 12x.
- I’ve been hearing that some deals are busted because of unrealistic sales expectations. Are you seeing this? No. We really haven’t. We’ve heard of some deals being busted because of due diligence. But we haven’t seen it for unrealistic pricing expectations.
- Do you think the IPO market is coming back to life? As the public stock market comes back, usually the IPO market experiences positive trends as well. [IPOs] have been down for so long that they’re due for a nice rebound, and I think we will see that. But the world has changed and you need to be a much larger company today to thrive in the IPO world than 10 to 15 years ago. It’s largely a phenomena for companies larger than the middle market. Some people will say a company needs to have $500 million in value…But to get good trading and an analyst following you need a market cap of $1 billion or $2 billion. Sometimes we see some smaller companies going public and they realize their float–the amount of stock traded on the open market–is not very much. They see it’s hard to get research analysts to follow them and they don’t get the valuations they expect. And they realize that they should be sold to unlock the value and we end up selling them. You need to be of a size to get attention of the market to get valuation you think you deserve.
- There have been a lot dividend recaps this year. Will we see more in 2011? We’ll see some more. That will follow the same path of the general M&A market. With debt markets being good and strong, and the growth of these companies continuing to improve, if owners don’t want to sell their companies, then taking a dividend recap is a viable alternative.
- What are you reading now? I’m reading a “Blue Ocean Strategy” by Chan Kim and Renee Mauborgne. It’s a really neat book about how to think differently about structures in very competitive industries.
- Any big predictions for 2011? I think more strength. The public market will continue to improve, the private markets will continue to improve. It’s not a hockey stick, nothing dramatic. Just that everything will continue to improve.
Edited for clarity