Leverage Trends in M&A
Businesses that are considering an acquisition strategy would be wise to capitalize on the robust leverage environment we find ourselves in.
From commercial banks and mezzanine lenders to business development companies and credit funds, there is no shortage of debt providers eager to put money to work. For acquirers, the availability of low-cost debt and favorable credit terms is making deals easier to pursue and ultimately supporting a booming M&A market.
Around the world, trillions of dollars in assets are available for investment, according to Bain. Both regulated and unregulated lenders are aggressively competing to deploy capital, leading to favorable pricing and covenant terms, thereby lowering acquirers’ cost of capital and increasing their valuation ceilings.
Financial and strategic buyers, buoyed by strong cash positions and willing credit sources, are competing aggressively and paying premium valuations for the limited supply of well-performing companies. Business owners looking to take advantage of historically low interest rates while retaining control of their business are also utilizing low-cost debt to fund dividends. In today’s frothy M&A environment, quality companies are demanding high valuations and becoming quite expensive for buyers to acquire.
For acquirers, it is important to lower weighted average cost of capital, which is made up of blended cost of capital across all sources, including common shares, preferred shares, and debt. These calculations are critical to establishing a prudent acquisition strategy. Acquirers thinking deals may be too expensive may want to rethink their internal investment hurdle rates and portfolio investment return targets to broaden their opportunities, according to Bain & Company. Another strategy for acquirers is to emphasize programmatic M&A with a series of smaller deals over time rather than a single larger deal.
This is a robust leverage environment with low interest rates and leverage multiples accessible through a variety of lending platforms. If your organization endeavors to grow through acquisition, make sure you are aware of these trends and prepared to capitalize.
Shawn Byerly is Managing Director of Copper Run’s Cincinnati office. He is focused on actively sourcing new buy-side and sell-side opportunities in the business services, distribution, and manufacturing sectors.