George Spilka George Spilka
Founder and President

If Selling Is in Your Future, Move Quickly

July 1, 2012
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As a I write this article late in March, I am more optimistic than I was last year about the prospects for the short- and intermediate-term (the next 2 to 3 years) acquisitions market. Market conditions will be strong throughout 2012, and likely will continue that through 2013 and quite possibly into 2014.

After that, the market becomes problematic, as I expect a severe downturn before the end of the decade that will dramatically impact the acquisition and financial markets in the United States, and perhaps the rest of the world. The economic conditions such a downturn will create likely will linger for an extended period of time, potentially and significantly damaging the market value of many U.S. companies.

Why Sell Promptly?

The following are certain reasons why companies looking to sell should consummate a sale no later than 2014, and preferably by the end of 2013.

1) Acquisition pricing is very strong, and I would anticipate pricing to remain strong through the end of 2013.

2) It is certainly possible there will be a second Obama administration. To begin to significantly reduce the deficit, more spending cuts will come, accompanied by tax increases. These revenue-raising measures primarily will focus on increasing taxes on the wealthy—perhaps significantly—including the capital-gains tax, which I expect to increase to at least 20 percent, if not 25 percent. An increase in the tax to 25 percent would reduce a company’s net after-tax sale proceeds by 10 percent—a sizeable hit.

3) Numerous private-equity (PE) acquirers have a pressing need to promptly invest capital. Many of these funds received money from their investors in 2008 before the market crashed, and much of that money has sat idle ever since. PE firms are under tremendous pressure from their investors to invest that money, and for certain companies they are willing to overpay rather than risk losing the deal. This produces attractive selling opportunities.

4) U.S. corporations are flush with cash and have extremely strong balance sheets. This makes strategic acquirers very aggressive in the acquisition market, and willing to pay strong multiples.

5) Interest rates are low and should remain so for the foreseeable future. I don’t anticipate the Federal Reserve deviating from its stated policy of keeping interest rates low until 2014.

Why a Catastrophic Event Is Likely

Here are reasons why the United States may experience a catastrophic economic and financial scenario by the end of the decade.

1) Europe’s economical and financial mess is far from receding. While it appears the European Union is trying to defer the problem, hoping it will go a, that is not likely to happen. The European banks also are in a much weakened condition. This will impact the world economy, as these banks have financial relationships with the world’s major financial institutions.

2) The United States faces several long-term challenges, including a huge budget deficit, the economic stimulus still required to get the economy back in a self-sustaining mode, and the gridlock between the warring political parties. This creates a nearly unsolvable problem, but we must continue working to bring the deficit under control during the next three years, without doing anything that would push the economy back into a recession.

3) The emerging markets have driven the world’s economy for more than a decade. However, current problems and others on the horizon will diminish the positive impact of the emerging markets on the global economy. Growth in China has slowed. And, its four major banks—all state-owned and supported by the national government —have been propping-up many failing state-owned Chinese companies.

Correspondingly the Chinese financial system is not as healthy as it appears. This will substantially impact all countries, but particularly the resource-exporting countries such as Brazil, which is China’s major trading partner. Further, India faces its highest unemployment rate since 1983, its lowest growth rate in two years, and an ineffective and corrupt government. Overall, the emerging markets are not going to be the world’s growth engine, which could have a major impact on the economies of the developed world.

4) There are numerous geopolitical hot spots, namely the Middle East, including Iran with its threat of nuclear weapons. This is exacerbated by the potential of an armed conflict between Israel and Iran. There also is the nuclear threat in North Korea.

Planning and Timing a Sale During this Risky Period

Company owners contemplating selling within the next 10 years have an opportunity during the next 24 to 36 months to realize a premium transaction price. Miss this window and owners risk that their company’s value may be significantly reduced due to events beyond their control. Companies contemplating a sale should retain an investment-banking firm that can properly position the company and wisely guide and time its sale. MF

Technologies: Management

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