Some recent, large deals would lead many to believe that the M&A market is on fire. However, there are some markets and regions that seem to be seeing more deals than others.
Corporate Growth, Capital Style recently had an opportunity to speak with The McLean Group’s Mitchell Martin about M&A activity in the DC-Metro area. Mr. Martin is the co-head of the firm’s M&A practice, as well as its Transportation and Logistics, Defense and Government Services practices. He is a highly experienced professional, having held a number financial advisory positions with leading investment banks focused on M&A for logistics and defense and government services companies.
We asked Mitch how the region’s M&A market compared to the nation as a whole, which industries are seeing the most activity and what is driving M&A activity today.
Here is what Mr. Martin had to say:
CGCS: How is the M&A market faring nationwide? Are there particular industries experiencing more activities than others? What is driving M&A activity in those markets?
Mitchell Martin: From all of the data sources we are tracking, nationwide it does appear to be a very active year for M&A. This is especially the case in certain segments. For example, in the Defense and Government markets we are seeing M&A activity up about 20% from this time last year, and in the Aerospace segment we are tracking M&A volume over 30% higher than this time last year.
So why is that the case?
There is no doubt the economy appears to still be in recovery; experiencing relatively modest quarter over quarter economic growth and the lowest labor force participation in a generation. However, driven largely by Federal policy, buyers have a number of tools to make acquisitions. With the S&P at or near all-time highs, stock is relatively inexpensive transaction currency and we are seeing it used more and more in deals. Additionally, interest rates remain near all-time low levels and banks and mezzanine (mezz) lenders appear to be very active and willing to put substantial leverage on deals.
Today, the use of stock and cheap debt, as well and the substantial amounts of cash we are seeing on balance sheets, have created an active M&A market with a lot of both financial and strategic buyers participating. While at a macro level we are continuing to hear concerns about the sustainability of federal and municipal deficits, the potential for increasing interest rates and inflation, etc., we are not seeing these concerns impact M&A decision making and deal volume.
CGCS: How does M&A activity in the DC-Metro area compare to the rest of the nation?
Mitchell Martin: I think that M&A activity in the DC-metro area is unique because of the focus on the defense and government markets and the tier two and three suppliers who support these segments. In many ways it is its own ecosystem that can trend very differently from the rest of the country.
For example during the downturn and ultimate recession from 2008 – 2010, M&A activity across all industries declined considerably, while the defense and government markets benefitted from the on-going wars overseas as well as the government economic stimulus. As a result, we saw M&A activity in the DC metro area continue to be active.
Conversely, 2013 saw a relatively healthy amount of transaction activity across the country. However, as a result of budgetary pressures that ultimately led to sequestration and the government shutdown, the defense and government M&A markets basically shut down – seeing the lowest level of activity in decades. These companies saw the US government, their main (often only) customer basically stop spending money and give limited guidance as to when it would start again. Additionally, shareholders in this segment were rewarding companies for returning cash through dividends and share repurchases. Outside of some opportunistic private equity groups and mid-tier players, there was simply little reason for many of the industry players to look at acquisitions.
So, this is a long way of saying that the DC-metro area is like most geographies in that it supports certain industries and has nuances that make it unique with respect to M&A activity.
For additional insights into M&A activity in the region, download the McLean Group’s “Aerospace, Defense & Government Services Q2 2014 M&A Report” by clicking HERE. For insight into the McLean’s Group most recent deal, click HERE.