L TE F O T E ETR R M H

MA A IGP R N R N GN A T E
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 One of our fellow IGAF Polaris member firms recently submitted a comprehensive article on the future ofMergers&Acquisition.ForthismonthIwantedtosharethisvaluablearticlewithourSingerLewak constituents.

M&A -WHATDOESTHEFUTUREHOLD?
As we all remember, the recession and collapse of the financial markets took its toll on merger and acquisition(M&A)activityin2008and2009.Activitydidpickupin2010andtheexpectationisthat M&Aactivitywillcontinuetoimprovethisyearandnext.These"headlines"areveryencouraging,but headlinesarejustheadlinesunlessthereissomesortofevidencetobackthemup.Thereare someindicatorsthatM&Aactivityshouldimprove. There is money to invest. PrivateEquityFirms(financialbuyers)andbusinesses(synergisticbuyers) havesignificantamountsofcashtoinvest.Dependingonthereportused,financialbuyershaveclose to$500billiontoinvestandsynergisticbuyershaveupwardsof$2trillion.Thisisasignificantsumof cashthatneedstobeputtowork.Infact,forsynergisticbuyers,acquisitionsmightbetheonlyway totoplinegrowth. Banks need to lend.Financialinstitutionshavestartedtolendmoneymorereadily.Thisshouldcome asnosurprisesincebanksneedtolendmoneytoearnanadequatereturnfortheirshareholders. Unfortunately,thusfar,themajorityoflendinghasbeenforlargerdeals.Whilesomewhatdefensible, it is causing deal-making to be difficult in the lower middle-market.Webelievethislendingtrendwill continue for some time as banks manage the risk in their loan portfolios. Skin in the game is required.Sincesmallerdealsarehardertofinance,theownerofasmaller businessshouldexpecttohavesomecontinuedinvestmentintheirbusinesswhentheysell.This continued investment might take the form of a seller note, an earn-out or a reinvestment in the equity ofthenewcompany.Eachofthesehastobeassessedbasedonthespecificdealandtherisk associatedwiththestructure.Forexample,ifthebuyerisaprivateequityfirm,undera recapitalizationstructure,areinvestmentcouldprovetobeverylucrativeinthreetofiveyears. Having knowledgeable advisers guiding you in making these key decisions is valuable. Taxes will rise.ThecurrentFederalcapitalgainstaxratesareduetoexpireattheendof2012.Asa countrycontinuingtoincreaseourFederaldeficit,itislikelythatrateswillincreasein2013.Owners are talking about this with more frequency, and we believe this will drive deal volume in the immediate future. Owners are fatigued. The owners that missed the M&A bubble in 2007 are now four years older and havemanagedtheirbusinessesthroughsomedifficultanduncertaintimes."Thethrillisgone,"asB.B. Kingwouldsay,andwethinkalotofbusinessownersaresingingthesamesong.Uncertainty continuestoexistinmanyareas.Theeconomicrecovery,legislation,regulationandtaxescontinueto beareasofconcernandconsternation.Wethinkthisisanotherdriverforincreaseddealflow. Niche markets are hot. ThereareanymanyotherthingsthatcanaffecttheM&Alandscapeina positive way and might be company specific such as being in the right industry: healthcare, technology andothers.Theseindustriesareinhighdemandandareattractingverygoodprices.Ownersin thesenichemarketswillbeinagreatpositiontocapitalizeontheotherpositivedrivers. As a country we strive to find a way to recover, and when we are successful again, the "new" normal will be a positive environment for M&A activity given the other drivers noted. There are any number of things that could happen that would change the landscape dramatically, but we see a bright future.

David Krajanowski, CPA Managing Partner