In the June 14th edition of Monday Monitor, put out by Mergers & Acquisitions, transaction advisors are urging sellers to close deals now while the economy is strong. The advisors who were interviewed believe the climate for M&A transactions for the remainder of 2019 remains very strong and stable. At Kaulkin Ginsberg, we agree.
Knowing that M&A transactions can take many months, if not a year or more, to complete, we want to share some of the highlights of this Q&A session and add our own perspective on the impact these topics are having on transactions involving accounts receivable management (ARM) and revenue cycle management (RCM) firms.
What is your outlook for middle-market M&A in 2019?
Monday Monitor: In 2019, the market is watching for legislative changes that may have long-term impacts, but the focus has been more granular – on company- and industry-specific fundamentals. The private equity fundraising environment has been great, with many firms raising new and larger funds. This large inflow of capital will fuel continued investment activity. The middle market has also seen increased buy-out activity by larger private funds who traditionally focused on multi-billion dollar transactions but are now also acquiring high growth middle-market platforms. There is a significant amount of dry powder among private equity groups and cash on corporate balance sheets to be invested, and the pressure to deploy capital should keep valuations near all-time highs.
Kaulkin Ginsberg: First, let’s define middle market for ARM and RCM. We classify companies with at least $5 million and up to $50 million in annual revenues as middle market. This translates to a minimum of $1 million to as much as $10 million or more in normalized EBITDA. The outlook for sellers of top performing companies within this range in 2019 and into 2020 hasn’t been this strong since the private equity era that lasted about 10 years, starting in 1995, when multiples were at their highest levels ever. Buyers are sitting on a lot of cash, competition is intense for desirable companies, the U.S. economy is strong, and interest rates remain low. Financial and strategic buyers alike are looking for the right platform and add-on companies to purchase. Companies with sustainable topline and bottom line performance that possess a strong leadership team are the most desirable.
What opportunities and challenges do buyers face?
Monday Monitor: The biggest opportunities for buyers tend to be in certain industry sectors where we are seeing a lot of activity, such as healthcare and technology. Challenges include valuation, competition for deals, pressure to deploy capital, pressure to exit investments, technological disruption and digital transformation – just to name a few!
Kaulkin Ginsberg: The biggest opportunities still exist within the healthcare, commercial, and state, and local government sectors. We are also seeing an uptick in certain parts of financial services. Challenges include inexperienced buyers who haven’t purchased ARM or RCM companies yet and the seller’s inability to demonstrate sustainable financial performance.
Do you expect an economic downturn?
Monday Monitor: While the advisors who were interviewed said they don’t see signs of an imminent recession; they are telling their clients to prepare for an economic slowdown in the next two years. Assuming no geopolitical shocks in the U.S. or beyond, we expect to see positive, but more muted, economic growth in 2019. Employment, consumer confidence and business sentiment are at or near record highs. With the Federal Reserve (Fed) planning to stabilize rates for the remainder of the year, we expect the leverage markets to remain healthy and corporate earnings to continue to grow while jobs are added to the economy and disposable income increases – all of which support growth in the equity market and M&A activity.
Kaulkin Ginsberg: Kaulkin Ginsberg sees only a moderate-to-low risk of recession soon. RGDP grew faster than expected in Q1 2019 in spite of an extended government shutdown, and muted inflation may induce the Fed to lower interest rates. A rate cut would lower borrowing costs, thereby spurring consumer spending, though it would also signal that the Fed may lack confidence in the overall strength of the economy. In addition, strong gains in employment and wages in the first of half of 2019 suggest that the labor market has room to become even stronger, despite a historically low unemployment rate. That said, escalating trade wars with China, Mexico, and India could temper economic growth, especially if they persist into 2020. The yield curve – i.e., the difference between long-term debt instrument yields and short-term yields – recently inverted as well, suggesting that markets are betting on economic growth being higher in the short-term than in the long-term. Though the inversion has been relatively short-lived, it still indicates that investors may somewhat doubt the robustness of the economy going forward.
Click here if you want to schedule a call to confidentially discuss market conditions for your business.