Every day, commercial bankers have discussions with businesses about mergers & acquisitions options. Except, in a down market, like now, it’s a lot more talking than anything else.
Pete Dontas, executive vice president and market executive for commercial banking at Wells Fargo, is regularly plugged into that decision-making with companies of various sizes and sectors.
In his portfolio now, he has a handful of companies in various stages of M&A discussions with other businesses. None are in a rush.
“They haven’t pulled the trigger, and each is really just waiting to see what happens in the market to something like interest rates,” Dontas said, adding these companies’ wait-and-see approach might last upwards of 18 months.
This comes after there was such a boost of transactions coming out of the pandemic, Dontas said. The stars aligned in the form of low interest rates, pent-up demand for transactions paused by the pandemic and enthusiasm about new opportunities in a changed consumer environment.
New Jersey’s financial sector leaders all tend to agree with the assessment other experts involved in M&A transactions are making: Deals are at a near-standstill now.
It’s not that the factors that once encouraged deal-making have gone away. As Gino Di Saverio, northern and central New Jersey market executive at Citizens, explained, there’s still an aging demographic trend pushing more business owners into conversations about succession plans.
In spite of that, he added, business owners are finding reason for caution.
“For one thing, you have a lot of businesses that experienced a pop during COVID, and that, after that explosion of new business, there was some retracing back to the norm,” he said. “So, that has added some ambiguity around what the performance baseline really is of a company, and led to some valuation disagreements.”
Di Saverio thinks of the region’s many logistics firms involved in packing and delivering goods at a time when people had less reason than ever to leave the house to make purchases. While those businesses haven’t had an excessive downturn since, they’re one of many industries experiencing post-pandemic softening of demand.
Savi Mittal, partner in strategy and transactions at EY, said there are also the macroeconomic factors weighing on M&A decisions, which have dragged deal volumes down to a third of what they were during their post-pandemic peaks.
“Also, the fact that you have continued geopolitical tension — though it may not impact every industry — is weighing on investors’ minds as they think about deal-making,” she said.
In a hesitating M&A market, Mittal said sectors such as life sciences in New Jersey are hedging with smaller investments and joint venture partnerships.
“It allows an organization to get to know a company without some of the perceived risks (of an acquisition),” she said. “Once they get to a higher level of confidence about that business, they can move to that full acquisition.”
Certainly, in a sector such as life sciences, which Mittal said hasn’t had M&A activity fall off as much as others, there’s an expectation of another upswing of activity, possibly as soon as 2024. By all measures, Mittal said, the outlook remains generally positive.
Dontas said banks such as his, despite all the issues surrounding regional banks that came to light over the past year, “have the capital to support transactions that make sense.” They’re ready for deals to get done.
“And I do think (deals) are going to … as long as the economy stays resilient,” Dontas said. “But, as we head into 2024, there’s going to be many of the same factors that determine how active buying or selling will be: inflation and interest rates, which go hand-in-hand; access to capital; and where transaction multiples ultimately land.”
Trending upward
Gino Di Saverio of Citizens has about two decades of experience under his belt as a banker in the New Jersey market.
It’s not a point he brings up to brag, but rather to point out how long he went without seeing the formation of more than one or two employee stock ownership plans, or ESOPs. These plans allow employees to purchase up the liquidity of the company they work for, which is then placed in a shared trust fund.
But, in the past few years, he’s seen many more of these arrangements start to spring up in the Garden State. In a recent example, the owner of a tech company with a lot of younger employees thought that, as opposed to a traditional sale, this alternative succession planning route would keep younger employees better engaged.
Although versions of these employee-led benefit plans are popular in European countries, there are only around 6,500 ESOPs in the U.S. In the years leading into the pandemic, 2014 to 2019, the number of these plans had decreased, according to data from the National Center for Employee Ownership.
“From my perspective, we don’t find so many of these forming up in a row by chance, and we’ve seen that,” Di Saverio said. “I expect this could become more of a trend locally.”
