“We are seeing M&A become the fastest route to reinvention in today’s digital economy.” – How U.S. M&A will transform businesses in a changing world, Ernst & Young
As Dr. John Binkley and the team at Generational Equity have noted on numerous occasions, we are enjoying one of the most robust seller’s markets in decades. U.S. M&A in 2018 ended on a high note, with deal value topping $2 trillion for the fourth consecutive year across North America, marking a 6.9% increase on 2017.
This trend shows no sign of slowing into 2019 either. Insight from Merrill Corporation on Mergermarket data demonstrates that the pace of deal making has actually picked up in the early months of this year, with 504 deals valued at $257.5 billion, eclipsing 2018’s $223.2 billion. This indicates to Dr. Binkley that the seller’s market is not over yet and buyers are doubling down on their efforts to secure fitting acquisitions.
But, what many business owners often don’t recognize is that the buyer who stands to offer the best deal might not necessarily be in the same industry as they are. Within the last few years there’s been an increase in attention to cross-sector deals, as businesses use M&A to expand in new markets, incorporate technology and grow their capabilities.
The rise of cross-industry M&A
Dr. John Binkley alluded to the increasing focus on cross-industry acquisitions in his article last year reviewing 2018’s M&A activity. This trend is expected by many to maintain in 2019, driven in large part by the desire of companies to integrate new technology in this rapidly digitalized world.
This point is explored in Ernst & Young’s 2019 sector outlook for M&A. They note how buyers, particularly private equity firms, are acquiring technology companies as bolt-ons for their existing platforms to improve their capabilities and remain competitive in an ever-shifting business landscape.
Rather than devote the substantial time, manpower and resources into developing their own technology in-house, it is often more time-efficient and cost-effective for buyers to acquire a company that already has the technology and specialist expertise to enhance their own offering.
In their full-year 2018 update of global M&A, PwC reinforces EY’s assertions that cross-sector deals were a pivotal part of that year’s activity, and will continue to be so this year. They revealed that over a third of U.S. corporate deals last year blurred sector lines, with this type of acquisition particularly prevalent among buyers in the media, telecom, pharmaceutical and life sciences industries.
Investment into technology companies is especially prevalent, as companies in traditionally non-tech sectors are now employing these to solve internal gaps, enhance their offerings to customers and remain competitive in a rapidly tech-reliant world.
451 Research revealed that acquirers outside the technology sphere have spent over $40 billion on tech companies in each of the last three years, a sign of the recent shift towards cross-sector M&A. And technology companies are also not shy of extending their reach into different industries, as demonstrated by Intel’s acquisition of Mobileye in an effort to become prevalent in the assisted and connected car industry.
However, the propensity to cross industry lines certainly isn’t exclusive to these sectors. KPMG conducted a thorough examination last year on the surge of cross-sector M&A in acquiring financial services companies. Their research clearly demonstrated the breadth of interest across industries in converging into this already broad sector:
Estimated share of sectors investing in financial services
- Construction & Real Estate – 16%
- Technology – 14.8%
- Industrial – 13.6%
- Energy – 11.8%
- Consumer Goods/Retail – 10.1%
- Transportation – 8.9%
- Leisure – 5.9%
- Media/Telecom – 5.3%
- Healthcare – 4.7%
- Others – 8.9%
For Dr. Binkley, this shows that the cross-sector M&A trend is not limited to one area or a passing fad in deal making – it is a signal of a more fluid business landscape. Companies that are seeking quick, meaningful growth are looking at opportunities to expand their capabilities and market share by looking beyond the bounds of their industry.
Don’t place industry limits on your exit strategy
A common thread connecting business owners that Dr. John Binkley and dealmakers at Generational Equity have noted over the years is the assumption that they will eventually sell their company to a competitor, or at least someone in the same industry. While that is certainly an option, by assuming this, you could place unnecessary limits on your options when pursuing an exit for optimal value.
That’s the difference between choosing an M&A firm that specializes in multiple sectors like Generational over boutique brokers. While boutique firms may claim to be able to help you find the optimal deal within your industry, that may not necessarily be the same as the optimal deal overall. It pays to explore all avenues and expand your horizons beyond the sector you operate in, as they could provide a more lucrative, synergistic and inviting proposition for the future of your company.
In 2017 Bloomberg supplied a list of cross-sector M&A deals that demonstrated how U.S. companies are looking outside their wheelhouse for new opportunities:
Each was a strategic decision to look towards an industry that is complementary to the acquiring company’s, but you must assume that the dealmakers involved took the time to scour the market and employed their cross-industry knowledge to find the optimal buyer for their clients.
Some of you may say “Why would a technology company be interested in my brick and mortar business?” But that’s not thinking like a buyer. Buyers look for intangible assets that don’t appear on the balance sheet, or ways your company can enhance their existing proposition, creating the proverbial 2 + 2 = 8 scenario.
In the end, your competitor may prove to be your optimal buyer. However, until you’ve explored the possibilities, you could be left wondering whether you left money on the table by sticking rigidly to the ever-reducing boundaries between industries.
The business landscape is changing, which Dr. Binkley credits in large part to the transformative possibilities presented by M&A activity in allowing firms to acquire technology, skilled personnel and new methodologies to increase their capabilities and remain competitive. The once-distinct divides between industries don’t exist anymore, and with that comes a whole new world of opportunity for exiting business owners to secure the maximum value.
Generational Equity’s diverse database of tens of thousands of business buyers allows the firm to present clients with in-depth expertise across a range of sectors, which has led to numerous examples of cross-sector pollination. By establishing a broad yet specialist approach to M&A, Dr. Binkley believes Generational presents all available options to middle market business owners preparing to exit.
Hopefully this has offered a greater insight into the prevalence of cross-sector M&A right now, the opportunities this offers for both professional buyers and those looking to exit, and the reasons why this environment makes choosing a firm that gives you options preferable when it comes to departing your business.
If you’d like to learn more about the current M&A landscape, cross-sector trends and the process of exiting a company for an optimal value, Generational Equity’s regularly updated insight page is a great resource for business owners thinking about their future.
In addition, Dr. John Binkley’s blog has several articles on developing your exit strategy, as well as other inspiring and motivational pieces.