A recurring question many clients ask is whether the current economic climate is appropriate for selling their business. The answer is yes. 2017 is a good year for a business transfer. I explain why.
Tighter regulation halts deals
Global transaction volume has soared since 2013. And in recent years, the value of mergers and acquisitions in the Netherlands has more than tripled. As a result, expectations for 2016 were high. Low interest rates combined with plenty of cash in the market would lead to a record year. However, that record did not materialize. In the end, 2016 became the year of the deals that fell through. Consider the deal between Shell and British gas producer BG. A deal worth $53 billion. And there were more that fell through after all. In the United States, a strengthening of antitrust laws meant that several deals on the other side of the ocean did not go through either. Consider the aborted merger between Pfizer and Allergan. Globally, many of the aborted deals are expected to be finalized in 2017. Rising markets, an improved economy and rising interest rates will ensure that parties who are coveting a transaction will not want to wait another year. But a growth in M&A transactions is also to be expected for the Netherlands. And this is for the following reasons:
Reason 1: financing is still cheap
An acquisition in 2017 is interesting for many companies because of cheap financing options. In recent years, the fact that companies could get cash cheaply has been one of the main drivers of the increase in the number of transactions. For 2017, interest rates are expected to pick up slightly, but financing will still be cheap.
Reason 2: together, companies are stronger
The (international) competition is ever increasing and those who are not “agile” and know how to innovate in time become vulnerable. Companies are increasingly realizing – with the crisis in mind – that worse times may also come again. In order to keep innovating and reduce vulnerability, companies are more open to collaborating with other parties. Even in the form of a merger or acquisition. In this respect, 2017 is a year with a favorable acquisition climate and therefore a good time for a business transfer.
Reason 3: It is now the turn of medium-sized businesses
Many large deals have been closed in recent years. These are always followed by transactions of a smaller size. The acquisition wave always goes from large to small and from worldwide to Europe and the Netherlands. Many small and medium-sized companies in the Netherlands have improved operating results in recent years and are now ready to sell after a series of good years. It is also expected that buying companies will go on an acquisition path more often in the coming year, because they both have liquidity and need to combine forces to move forward. They take advantage of the synergy benefits associated with the acquisition to share fixed costs and boost dwindling profits.
Reason 4: Chinese show interest
Chinese companies want to catch up with European competition and are increasingly looking at corporate acquisitions to do so. After all, a company takeover is a quick way to acquire technological and operational knowledge. In the “renewables” sector alone, Chinese companies have made $764 million worth of acquisitions in Europe. That will be much more in the coming year. Chinese companies have recently announced for the year 2017 to increase the acquisition amount to $5.5 billion in the alternative energy sector (Bloomberg, 2016). Chinese investors’ interest in Europe is high. In general, European companies are considered cheap given the high P/E ratios on Chinese stock markets. The Brexit is now causing the Chinese to shift their attention more to Germany and the Netherlands. We notice this in our practice.
Reason 5: The Trump effect
The future is more unclear than ever. No one knows where the market will go. Trump’s appointment as president of America will only fuel that uncertainty in the coming years. In this regard, 2017 is still a relatively stable year and survivable. Therefore, for both buyers and sellers, this year is a good time for a transaction. One thing is certain, interest rates are likely to pick up significantly in the coming years. Trump is already being called the “inflation president. Rising interest rates mean higher financing costs. It is wise to get ahead of this and start a possible merger and acquisition process as soon as possible in order to still benefit from cheap financing and favorable sentiment.
Are you also thinking about selling your business? Then contact Clifton Finance for a sharp analysis of your company. We will use a Quick Scan to determine whether your business is ready to be sold or whether there are still a number of measures that can be taken to improve profitability. Therefore, perhaps 2017 is the best year for you to sell your business.
By: Maarten Vijverberg