The State Of The M+A Marketplace And One “Big Picture” Concern
By Tom Schramski, PhD, CMAA
Volume 2 Issue 18, September 1, 2015
Despite the recent economic news from China and the corrections in world stock markets, we continue to see positive deal indicators in the US, with the usual caveats.
- GF Data ® M&A Report for August 2015 indicated that transaction volume for the first half of 2015 was up modestly compared to the same period one year ago, with the premiums for platform investments vs. add-ons returning. Three characteristics – institutional ownership, above-average financial performance, and continuation of management post-closing – appear to enhance transactional value. Our healthcare vertical continues be a strong part of the market.
- The Pitchbook M&A Report Q3 2015 echoes much of the same data with strong M+A activity in all areas, though healthcare slowed slightly in Q2 2015. With increased numbers of millennials becoming insured, expanded coverage requirements (e.g. substance abuse treatment) under the Affordable Care Act, and further consolidation, it is suggested that greater transaction activity will take place in the second half of 2015.
These reports and others likely point to the pent up transaction demand for baby boomers who appear to be engaging in the new “phase out” retirement phenomenon noted in August 28th edition of the New York Times. Many baby boomer professionals are rejecting the “one day I’m working, then all I do is play golf” classic retirement for a variety of reasons, including maintenance of key benefits (i.e. health insurance) and the desire to continue the intellectually satisfying elements of their work. It may be that transitions are played out in a different manner over a longer period of time than originally predicted.
In addition, there is another factor that looms, with unknown impact on projected M+A activity, as well as our economy generally – increasing wage disparity. As Federal Reserve Board (FRB) chairwoman, Janet Yellen, noted in a report to its Board of Governors last year, income disparity is “…one of the most disturbing trends facing the nation.” FRB statistics from 2007-13 indicate that the disparate concentration of wealth in the US was equal to what it was in the 1920s immediately prior to the Great Depression. In 2013, the proportion of income captured by the top 10% or earners was 47.5%.
How could this be a problem for the M+A markets including healthcare? As Christine Lagarde, the International Monetary Fund (IMF) Managing Director was quoted in a Bloomberg Business Week interview last year, the increased income gap risks creating “an economy of exclusion” that threatens to stunt economic growth in the US and worldwide, with further concentration of wealth and decreased opportunity for most. For the M+A marketplace, the possible concerns are related – shrinking values, fewer true buyers at the lower end of the middle market, and more consolidation of market segments.
This is not the typical data we cite when talking about middle market M+A, especially healthcare, but the “big picture” implications are evident.