We have experienced a change in the nature of activity in Mergers and Acquisitions. The overwhelming number of transactions seems to be driven by aggregators who are backed by private equity or are privately held or publicly owned companies that make strategic acquisitions designed to grow their top and bottom line revenues. This revenue growth comes from the synergies potentially realized by acquiring competitors or provider companies (i.e., those companies that supply services/products in the vertical and horizontal markets that serve the acquiring company).
This shift has come about because of the financial and economic downturn that has existed over the last 4-5 years. Companies that have succeeded in trimming their excesses and in creating increased profits out of decreased or stagnant revenues, have finally realized that the market will more than likely continue along this trend, at least over the next few years, even if it’s moving toward recovery. Flushed with cash, and this realization, they have turned to the strategies outlined above. Two observations: first, this has produced relatively good multiples for the sellers who are the targets of these acquisitions, primarily because they are seen as “the best of the best” in their respective industries; second, this acquisition strategy has made it more difficult for the frail to compete and survive. Consequently, since many of these weaker companies are owned by baby boomers, it leaves their owners with little value in their businesses to fund their retirement.
Unfortunately, this appears to be a trend that will continue into the near future. During this time, many of those baby boomer businesses will falter. This filtering process is not new, but it does affect an inordinate number of small businesses. This, of course, will adversely affect employment as these small business owners will have to terminate employees who they can no longer afford to employ.
Ultimately, if left alone without excessive government intermeddling, the market will self-correct over time.