2014: Maybe the happiest New Year in a while for middle-market M&A

To view original article click here.

By James S. Cassel
January 19, 2014

When it comes to middle-market mergers and acquisitions, 2014 is positioned to be quite a happy new year — the best one yet since 2008. For middle-market business owners seeking to sell their businesses, borrow money or raise capital, it looks like the stars may align to present attractive opportunities.

Typically, the M&A market gets bifurcated into large deals and small deals. In 2013, the large deal business came back but the middle market lagged. In 2014, we will see the large deal business continue while more small deals and middle-market deals begin to happen.

M&A last became bullish in 2006, and the market has since been hungry for another peak. Q4 2012 was particularly strong, and some middle-market analysts projected that 2013 would post record-breaking valuations for businesses, creating an ideal climate for exits and driving bidding wars. However, preliminary data show that the middle market lagged a bit in 2013, as the overall dollar value of deals closed in 2013 was only slightly higher than the dollar value of deals closed in 2012. According to a January 2014 S&P Capital IQ report, the dollar value of deals surged by 20.1 percent across the board between 2012 and 2013, predominantly driven by a few megadeals, but the number of deals actually slipped by 3.9 percent.

The end of 2012 was particularly strong due to the tax law changes. The slower deal volume can be attributed in 2008-2012 to a wide array of factors, including posturing in Washington over tax and estate issues, the slow debt market recovery, lack of job growth, and the stalled economy. Granted, this slow upward trend has been building since 2008, and early projections for 2014 indicate that this gradual increase will continue throughout the year. There could be pent up demand to sell.

In my experience at Cassel Salpeter, an investment banking firm that focuses on the middle market, several industries — namely healthcare, media, telecom and technology, financial services, insurance and real estate, retail, energy and manufacturing — enjoyed more concentrated deal-making opportunities. Companies with predictable cash flow were able to leverage multiples of four and five times cash flow, and companies with EBITDA in excess of $25 million gleaned even more. Calling 2013 a bad year or a good year all depends on where you happen to be standing, but across the board, it was a year of learning, and those lessons shed a telling light on what the market can expect from 2014.

In a recent KPMG survey of more than 1,000 M&A professionals, approximately 63 percent responded that their U.S. companies or clients will initiate at least one acquisition this year, and 36 percent expect their companies or clients will complete a divestiture. In a similar survey among 145 C-level executives, almost three quarters indicate that they expect their companies to make an acquisition in 2014 — almost double from last year. Are they righteously optimistic or kidding themselves?

The key drivers of this uptick in M&A confidence include: employment is improving; GDP has increased and is expected to be north of three percent in 2014; customer confidence has improved; home values are improving; the stock market is up; and interest rates remain relatively favorable. Despite the doom and gloom forecast that has been permeating some media, which is now finally subsiding, there is still a powerful notion of stability and safety in North America’s M&A markets. So, while regions like Western Europe and China might have some opportunities, the U.S. will undoubtedly attract dollars from investors seeking stability and growth.

Although 2014 might produce some megadeals, the middle market will be the main driver of M&A. According to the KPMG survey, approximately 77 percent of survey respondents say they expect their M&A deals to be valued under $250 million. This is an important detail: Middle-market executives have expressed confidence regarding their ability to access credit markets to finance deals, and simultaneously, a wide swath of companies are sitting on large reserves of cash, so these middle-market deals will become attractive targets for larger companies in the coming 12 months. The savvy ones have spent the past few years paying down lines of credit to prepare for the next bullish era of opportunities.

On the subject of credit, interest rates will remain low for at least the first six months of the year, maybe longer. Simply put, it’s ideal to borrow now, because if and when the Federal Reserve reduces its stimulation, interest rates may begin to move. A small uptick will produce minimal impact, but more significant increases could shake things up.

That doesn’t mean there isn’t money out there, particularly in the private equity markets and strategic buyers. Private equity firms are flush with cash and credit availability as are companies. Companies are looking to buy, and the convalescence of factors like cash reserves and increased consumer confidence will produce a favorable environment in 2014 for companies looking to make acquisitions. In addition, we can also expect that this will be a good year for initial public offerings, particularly for technology, financial services and health care ventures.

The unknown is not whether there are buyers but whether there are sellers willing to sell. At some point, aging business owners will make the difficult decision and take the plunge. As with all things, time will tell how the New Year will treat the middle market’s M&A sector, but insights from last year and new developments in the market are promising a healthy and strong 2014.

James Cassel is co-founder and chairman of Cassel Salpeter & Co., LLC, an investment-banking firm with headquarters in Miami that works with middle-market companies. www.casselsalpeter.com

American Banker: Florida Likely to Experience More M&A in 2014

Click here to view the original article.

By Jackie Stewart
January 2, 2014

Much like Florida’s weather, the forecast for bank consolidation in the state is bright. Mergers in the state picked up last year and some industry observers believe the pace of acquisitions could accelerate in 2014. Interest from foreign investors, along with regulatory pressures, could prompt more banks to sell.

“I fully expect there to be a flurry of activity in the coming year,” says Bowman Brown, a partner at Miami law firm Shutts & Bowen. Small banks in Florida are “under tremendous pressure so a very large number … are thinking in terms of acquisition or disposition.” Through Dec. 12, Florida had 13 deals last year, or nearly twice the activity that took place a year earlier, according to KBW. Nationwide, M&A is on pace to be relatively flat compared to a year earlier, in terms of the number of deals.

The bulk of Florida’s deals involved banks in the southern part of the state. South Florida has roared back since the financial crisis, as evidenced by several new construction projects, says James Cassel, chairman and co-founder of Miami investment banking firm Cassel Salpeter.

“For a while when I looked out [my office window] there were maybe 20 cranes and then there was a time there was just one,” Cassel says. “Now we are on our way back up to 20. South Florida is a growing, thriving market.”

The Miami area’s recovery involves an influx of investment from foreign groups based in Spain and South America. Citizens from countries like Brazil frequently visit south Florida, and Miami continues to serve as an important place for international trade, says Fernando

Alonso, a partner at Miami law firm Hunton & Williams. So it makes sense for foreign banks to seek out acquisitions to expand in the region.

In early 2013, Chilean bank Banco de Credito e Inversiones agreed to buy the $4.7 billion- assetCity National Bank of Florida from Spain’s Bankia. Banco Sabadell in Spain agreed
to buy JGB Bank in Doral, Fla., and Lloyds Banking Group’s international private banking business in Miami.

Similar acquisitions could take place next year, industry observers say.

“Miami has shown it is a resilient market, not just domestically but also with strong foreign investor influence and strong infrastructure from international trade,” says Carl Fornaris, co-chair of the financial regulatory and compliance practice at the firm at Greenberg Traurig. “You will see continued interest in south Florida.”

Pricing has firmed up, with at least five banks selling for more than tangible book value. Valuations should continue to rise next year, especially around Miami, as banks have fewer problems, industry experts say. As the number of community banks declines, buyers might be willing to pay more for the institutions that remain, Fornaris says.

Foreign interest in southern Florida could influence activity elsewhere in the state, says Alonso, who worked with Sabadell on the JGB and Lloyds deals.

“It is not unusual to look up the coast for other potential targets,” he says. “I do think Florida can and does work in many ways as a unified market. I don’t think it has in the past, but it is becoming more of a natural expansion for those already in south Florida.” There were a handful of deals across the rest of Florida in 2013, and industry observers are hopeful that more will take place next year. Real estate prices have recovered enough to allow banks to sell foreclosures at better prices, says Thomas Rudkin, a principal at FIG Partners. Stronger community banks are also looking for ways to grow in existing or adjacent markets, especially in areas like Orlando, Tampa and Jacksonville, he adds.

Buyers could include other Florida banks or institutions in nearby states such as Arkansas, Louisiana and Texas, Rudkin says.

For instance, John W. Allison, chairman of Home BancShares in Conway, Ark., has indicated an ongoing interested in Florida’s banks. The $387 million-asset

FirstAtlantic Bank in Jacksonville was also looking for deals, President and CEO Mitchell Hunt said last year.

Sellers will likely include smaller banks that are finding it difficult to compete as the cost of regulation rises, though this is not a unique issue for Florida, industry experts say. Some banks could opt to sell if they struggle to raise new capital, Rudkin says.

Banks with significant market share “are the ones that are seriously looking to raise capital because they have the market presence to do well,” Rudkin says. “Others have a more difficult process ahead of them.”

HCBF Holding in Fort Pierce, Fla., which bought BSA Financial Services in St. Augustine, Fla., last year, would like another deal, possibly along Florida’s east coast or the central part of the state near existing markets, says Chairman and CEO Michael Brown Sr. The $621 million-asset company has access to enough capital for a bigger deal, he says. HCBF would prefer to buy a bank with a clean balance sheet, though it is willing to consider one with some troubled assets. HCBF’s first acquisition was a failed bank, so Brown feels like his management team has the expertise to work out problem loans. “Clearly the operating environment has improved in Florida,” Brown says. “We still have the regulatory challenges, so we are likely to see the same pace of deals next year. Not everyone who talks to suitors is really ready to sell, though. There are a lot of conversations.”