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This article first was published in the Upstate Business Journal.
Although M&A activity in the first half of 2016 declined from the record highs of 2015, conditions for M&A activity remain strong. South Carolina companies should expect continued interest from both private equity firms and strategic buyers for M&A deals.
Were M&A markets active in the first half of 2016?
According to MergerMarket, there were 2,291 deals in the U.S. in the first half of 2016, down 11% from the first half of 2015. Aggregate M&A deal value was $577 billion, which represented a 30% decline from deal value in the first half of 2015.
M&A activity in the South experienced a similar decline in the first half of 2016, with a reported 8-10% decline in deal volume as compared to the first half of 2015.
Overall M&A activity, however, remains strong. M&A activity in 2015 hit record highs, driven in large part by megadeals (deals over $5 billion). M&A activity in 2016 has generally outpaced the post-recession years of 2009-2013. Many M&A professionals view the 2016 pace as a “normalization” of deal activity rather than a dramatic shift.
What drives M&A in South Carolina?
South Carolina benefits from a strong base of middle market companies, defined as companies with revenues between $50 million and $2 billion. There are more than 450 middle market companies in South Carolina. In Upstate South Carolina alone, there are more than 170 middle market companies.
The decline in overall M&A activity in 2016 as compared to 2015 is driven in part by the lack of megadeals. Several megadeals closed in the first half of 2015, the largest of which was the acquisition of Time Warner Cable by Charter Communications for $71 billion. Fewer megadeals have closed in 2016, with several well publicized deals being abandoned because of antitrust and other regulatory concerns.
South Carolina M&A activity largely is driven by middle market deals rather than megadeals. Middle market activity usually remains steadier than megadeals through economic cycles. As a result, South Carolina often experiences less dramatic swings in M&A activity than some of the other regions.
Also, M&A activity varies significantly among sectors. Despite the drop in overall M&A activity in the first half of 2016, MergerMarket reports that the Industrials and Chemicals sector in the Southeast grew year over year. South Carolina has similarly experienced significant M&A activity in the Industrials sector, followed by strong activity in the Consumer & Retail and Healthcare sectors.
Importantly, many large global organizations are headquartered in South Carolina. A large portion of South Carolina’s M&A activity is “outbound” M&A – the acquisition by South Carolina companies of businesses located in other states or countries. Many global companies and middle market companies in South Carolina actively are engaged in outbound M&A activity. Those acquisitions strengthen the companies located within South Carolina and fuel future growth.
What is the outlook for M&A in South Carolina for the remainder of 2016?
Conditions for M&A, particularly in the middle market, are strong. Many strategic buyers continue to struggle to grow organically. With large cash balances and a favorable lending environment, corporations are motivated to seek growth by acquisition.
Private equity firms – which are reported to have some of the largest funds to date – are competing with strategic buyers to deploy those funds. The proliferation of smaller private equity funds, and private equity funds seeking bolt-on acquisitions for existing businesses, create increased demand for middle market companies. These conditions bode well for South Carolina companies interested in a sale.
Similar to other economic activity, M&A thrives in conditions of certainty. Global economic uncertainty, the upcoming presidential election, and unstable oil prices are cited as conditions that caused M&A activity to stall in the first half of 2016. Whether or not these conditions stabilize, both strategic buyers and private equity funds may feel pressure in the second half of 2016 to complete acquisitions to fulfill strategic objectives.
How should buyers and sellers approach M&A in the last half of 2016?
Sellers have the advantage in today’s market. As a result, sellers should try to negotiate all significant deal terms during the bidding process.
In addition to the purchase price, sellers should negotiate terms – such as the escrow amount, escrow release date, working capital adjustment, indemnification thresholds and caps, non-competition restrictions, and post-closing employment arrangements – on the front end of a transaction. The seller’s negotiation leverage is greatest when buyers are competing to win a bid. That leverage decreases substantially after the seller selects the winning bidder.
In a competitive M&A environment, a buyer needs to offer a top-of-the-range purchase price to win a bid. Extensive due diligence, coupled with detailed integration planning, is always the best approach to minimize acquisition risk.
Both buyers and sellers benefit from an efficient M&A deal process. The seller should investigate the potential buyer to determine whether the potential buyer has a history of successfully closing acquisitions. An experienced buyer is more likely to have internal processes in place to help drive an M&A transaction quickly towards closing.
The buyer should evaluate the seller’s business to determine whether the seller’s systems and processes are robust. Based on that assessment, the buyer should determine the scope and timing of due diligence and clearly communicate those expectations to the seller at the start of the deal process.
Both the buyer and the seller should pay attention early in the process to the dynamics between them and communication styles. When the buyer and the seller communicate effectively from the start, the odds increase that the acquisition will proceed smoothly to a successful closing.
Melinda Davis Lux is a corporate and M&A attorney at Womble Carlyle who has more than seventeen years of experience providing guidance on sophisticated merger and acquisition, joint venture, and corporate financing transactions.
view pdf version here: 2016.09.09.16-17