M&A Activity Dips, But Lull Won't Last Long

August 2012 | Kansas City Business Journal | James Dornbrook       Download PDF      Print

Deals in the pipeline portend busy third, fourth quarters

Publicly announced mergers and acquisitions activity in the Kansas City area slowed down substantially in the second quarter, but experts expect the action to pick up before the end of the year.

A report by Kansas City-based Country Club Advisors showed 29 deals completed in the second quarter of 2012 and a total of 66 deals for the first half of the year. That's down from 43 deals in the second quarter and 76 deals in the first half of 2011.

"Companies build cash, start to gain a bit of confidence and go out and look for acquisitions," said John Hense, managing director of Country Club Capital Advisors. "Then something happens, and they put on the brakes. It's been everything from the Greek debt crisis to the drought in the Midwest. In an economy that is already very fragile, those types of things just slow everybody down."

Hense said the M&A report does include some promising signs, especially that two billion-dollar deals were completed in the area: the $2.6 billion sale of AMC Entertainment Inc. to the Chinese conglomerate Dalian Wanda Group Ltd. and the $1.8 billion sale of Inergy Propane LLC to Suburban Propane Partners.

"If you look on our report last year, we didn't have any deals over $1 billion that were publicly announced," Hense said. "So, already we have two $1 billion-plus deals, which is a good indicator that maybe things have started to loosen up a bit. Unfortunately for us in Kansas City though, they were both sell-side deals."

Pat Trysla, managing partner of Kansas City-based Frontier Investment Banking Corp., said he's seen all the local, national and global data showing a slowdown in M&A deals in the first half of 2012. However, he's expecting the fourth quarter of 2012 and the first quarter of 2013 to be the best in his company's history.

"We're busting at the seams right now trying to get five sell-side deals done, which is a lot for us," Trysla said. "We also have three or four buy-side agreements under discussion. We've never been busier. At this moment, we're expanding and adding some people."

Trysla said he thinks most of the market activity is driven by uncertainty about the upcoming presidential elections and expectations that capital gains tax rates will increase.

Tim Skarda, founder and managing director of Allied Business Group, said he's trying to sell eight companies. The deals mainly are being driven by changes in life circumstances for the owners, typically retirement, he said.

"They've been waiting and maybe wanted to sell in 2008 and 2009 but couldn't until the numbers went up, and the business was more in line with what buyers want to see," Skarda said. "Now that's happened, so they're re-entering the market."

A lot of capital is floating around in the market, with firms looking for businesses to invest in, he said. Private equity companies are getting more aggressive, and banks are much stronger than they were a few years ago.

"Overall, I'd say the debt markets and equity markets are out there seeking the right investments," Skarda said. "There is capital available, but it's got to be for the right deal. They're being careful and looking for companies that are performing."

Trysla said prices have remained consistent for market-leading companies in good financial shape. Troubled companies in competitive markets have more problems getting deals done, unless they are sold at a very conservative multiple of annual revenue.

"It's kind of business as usual," Trysla said. "Everything in the M&A market isn't trending on a beautiful line, but things are continuing to get better. The buyers who are doing due diligence on deals aren't wringing their hands in worry about another recession. They're looking at a company's position in the industry, sales projections, and understanding the factors driving all that."