Revamped with brand-new datasets expanded in scope and depth, the latest RSM US Quarterly Industry Profile for the business products and services industry is now available. Powered by the PitchBook Platform, the report offers in-depth insight and analysis of M&A and private equity activity, exits and performance in the industry. It also includes greater, more in-depth analysis of key datasets for PE investment, comparing trends in North America versus those of Europe.
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Highlights in this report include:
- Total B2B deal flow by year and quarter, broken out by region
- Breakdown of transactions by deal size, sector and deal type
- Median deal sizes
- Add-on deal activity
- Select 2Q 2017 B2B transactions
- A detailed look at exit activity in the industry
B2B At A Glance
Uncertainty remains
- There is lots of potential activity and fundraising around infrastructure assets following the Trump administration’s stated goal of $1 trillion of new federal spending. Optimism is high that private capital will be directed towards roads, bridges and airports, and the middle market companies that can help build them.
- PE firms continue to wonder about varying tax questions, including the border adjustment tax. What will overall corporate and pass-through rates look like? Are they going to be substantially lower? Will the interest rate deduction go away?
- Valuations aren’t likely coming down any time soon. There are simply not enough companies to acquire given the amount of capital floating around the market right now. Only unforeseen political or regulatory factors have the potential to drive price tags down.
- PE firms have been more creative in recent years, putting some of their funds in sidecar vehicles, investing in earlier-stage growth companies, and doing debt transactions or minority preferred transactions.
- PE exits have slid recently, likely a reflection of investors focusing on fundraising.
- M&A activity should continue to be strong. Companies are looking to differentiate themselves in the marketplace and
add additional services, products and geographies. - With multiples near all-time levels, tax situations become much more prominent and important in how they’re approached.
- There’s positive momentum in both rail and air transportation, and deal activity should top meager 2016 totals.
M&A Deal Flow
M&A optimism on the rise
M&A activity continued to slide in the second quarter. Volume has declined almost continuously since Q1 2016, registering just 1,184 deals in Q2 2017 versus 2,413 deals completed six quarters ago. Michael Fanelli, partner with transaction advisory services at RSM US, says the data belies the amount of activity in the pipeline. “Some of the bankers I talk to have said this is the biggest pipeline they’ve seen in their careers, so we don’t think there’s any real story to it.”Political uncertainty does still hamper deal activity, though the same question marks around fiscal and regulatory adjustments haven’t changed significantly, even six months into the new administration.
B2B companies continue to search for ways to differentiate themselves. Acquisitions are a helpful solution in this environment as strategics look to add additional services, products and geographies. Add-on acquisitions tend to be an easier way to expand compared to starting new business lines or geographic presence from scratch. Companies looking to acquire in this market, Fanelli adds, need to be mindful of integration risk, especially with multiples as high as they are. “If you don’t have significant M&A experience or the right platform or the right marriage, execution risk is high. People, financials and branding are all key variables in the process.
Given the industry’s pipeline, third-quarter optimism is high. “We think first half numbers were something of a timing issue across the board. We think Q3 is going to be a really good quarter.”
Private Equity Deal Flow
Deal-making takes backseat to fundraising
Private equity (PE) volume fell for a fifth straight quarter in Q2, though overall value was in-line historically. Through the first half of 2017, 1,006 deals were completed across North America and Europe, a slower pace versus the 2,725 deals recorded last year. Deal activity has taken a backseat to fundraising over the past ten to twelve months, and as investors flee from hedge fund stakes, more money is pouring into PE. With greater and greater levels of dry powder, PE firms are running into the familiar roadblock of too much money and too few targets. “There simply aren’t enough companies to acquire for the amount of capital in the market right now,” says Fanelli, who adds that PE firms have become much more creative in deploying their capital, including debt transactions, minority preferred transactions, and raising sidecar vehicles.
Given high valuations, PE firms are being increasingly careful about which assets they go after and spend their energy on, according to Harshad Khurjekar, director of transaction advisory services at RSM US. “We’re seeing investors get more pre-deal work done out of caution because they know they’re going to end up paying higher multiples.” Fanelli adds that price is only one component in today’s market. “The other part is figuring out if they can put the right structure in place to add value, either to the top line or the bottom line. They’re doing more work before getting exclusivity, and they’re spending more dollars on advisors like us for legal and environmental work to show the company’s bankers how serious they are for that asset.” Among other questions, PE clients are asking for help surrounding tax issues, including the border adjustment tax, overall corporate and pass-through rates, and whether interest rate deductions will go away. Khurjekar adds that because multiples are so high, the tax situations for good companies have become much more prominent and much more important in the current environment.
Industry professionals don’t expect valuations to come down any time soon. According to Fanelli, “we don’t see anything in the market that would lower multiples right now other than an unforeseen political, regulatory or natural disaster-type event. Multiples are levelling out right now into a new normal.” To target higher returns, many PE firms are focusing on add-on acquisitions to achieve multiple arbitrage. “Those roll-up strategies are very relevant to middle market companies, and many of our PE clients are using the strategy successfully in certain sectors,” says Khurjekar.
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