Let me start by making the case for performance. Before becoming an investment banker, I remember hearing repeatedly that the key to a successful exit was your company’s performance. Regardless of industry, experts agreed that to be successful you needed: a strong compound annual growth rate, high margins, a diverse and sticky customer base, strong customer satisfaction, and a talented team that is willing to stay on. Market share in a growing market, competition, and something called “synergy” are also important.
We marketed a number of the companies I ran following this mantra. Through the 70s, 80s, and early 90s, our efforts were rewarded. More often than not we received more than expected, even though some of the companies barely met the desired performance levels. Sadly, the same wasn’t true beginning in 1999 and the early 2000s. And therein lies the answer to the question.
The Buyer’s View
Even though the staffing/HRO companies we were selling beginning in 1999 had superior performance characteristics, we didn’t enjoy the same results. We had high hopes in 1999, when a buyer was ready to pay more than our goal — until he changed his mind.
For those in staffing at the time, I am sure there’s no need to explain what happened. Developments outside of our control changed the buyer’s view of potential risks — namely: the bursting of the dot-com bubble, Y2K non-event and 9/11; recession and the jobless recovery. Superior performance no longer mattered; the window had closed, leaving many sellers struggling to keep their companies whole.
Buyers may use past earnings to set value, but they base their decision to buy on an estimate of future earnings under expected market conditions. The lesson here is that a buyer’s view of future macro risks will trump past operating performance. It turns out our M&A successes all those years were due to a happy combination of our good performance and favorable market conditions.
The good news for 2013 and 2014 is that most buyers remain guardedly optimistic and very interested in companies with those desirable performance characteristics. Continuing growth, substantial uncommitted funds and low interest rates will likely make the remainder of 2013 and 2014 good for sellers.
At the same time, buyers are aware that big data, cloud computing, social recruiting/algorithms, changing workforce characteristics, and expanding service menus are having an impact on the industry. They are also keeping a nervous eye on the affects of sequestration, continuing deadlock over deficits, and the possible long-term impact of ACA rules.
Perhaps the best way to summarize my experience is this: Buyers may agree that you’re a great performer, but to get to the top of the M&A building, be sure to catch the elevator while it is still going up.