I recently interviewed Hector Cuellar, the President of McGladrey Capital Markets, on the state of M&A in the middle market. According to him, it’s not as dead as everyone says. You just need to know where to look.
What is keeping an investment banker like yourself busy these days?
There is a “mood” that deal volume is down, but we never felt that on the origination side. We got 11 mandates in January. The only difference is, a year ago those would have been around 80% sell side and 20% buy side. Now it’s around 65 to 35.
What industries are the mandates coming from?
Well there is no distress in the aerospace and defense sectors yet. Their supply chain will come under pressure, in aerospace especially. Acquirers in the defense sector are getting quiet offers from mid-sized companies interested in selling. The mid-sized players realize that the time to grow is now, and some of the larger players may have liquidity needs or are ready to sell divisions.
Thus the mid-sized players should strike now. Just look at the deal announced on Friday….Woodward Governor bought HR Textron from Textron, a company that’s having liquidity issues because of their Finance division.
So you’re saying deal multiples haven’t come down in those sectors?
Yes, deal multiples are holding up in health care, technology and defense. We’re signing up truly new deals in those sectors, as well as energy and infrastructure. In the other sectors that aren’t holding up, seller expectations have come down.
In defense specifically, some of the players are waking up and seeing a winding down in Iraq. Afghanistan will still be there, but there’s also the harsh reality of programs not being filled and a general reduction of funds to the area.
How are buyers lining up financing for these deals?
ABL lending is where it’s at. The more assets you have the better deal price you can get in a sale. We’re not going to see cash flow lending for awhile.