Merger Monday: M&A Market Continues to Heat Up

As the article indicates below, the M&A market is heating up. Could this market high be created by a perfect concoction of cheap money and corporate strategics and private equity funds’ eagerness to deploy excess capital in the era of low organic growth? I think so.

This trend is not exclusive to publicly-traded companies, but is prevalent in middle-market government contracting firms as well. In this age of LPTA, sequestration, and continuing resolutions; strategics and private equity firms (for their platform companies) alike are looking to acquire firms that would a) give them access to certain type of work, be it cybersecurity, healthcare IT, or intelligence analysis, or, b) give them access to certain customers, be it the three letter agencies or certain well funded civilian agencies.

This strategy looks more and more attractive, once compared to the alternative of cultivating such business organically, which requires significant investment in form of cost, time, and not to mention uncertainty of sinking funds into a marketing blackhole. This trend is further facilitated by the availability of cheap capital seeking a healthy yield, not to be found so easily in the market today.

Just the other day, I had a prospective sell-side client remark about how she thinks the time is right as she just won some large awards with a coveted agency, while a buy-side client on the same day remarked that he thinks it is the perfect time to buy as he can leverage a good acquisition to achieve further growth. You know the market is ripe for dealmaking, when the seller thinks it is the right time to sell and the buyer thinks it is the right time to buy.

But behind the emotions and the chatter, lies the relevant question. Is the deal accretive or dilutive? In other words, is the benefit of the deal higher than its cost? A good CFO and/or a good investment banker can answer this question with relative ease through use of financial modeling, market research, and proper risk allocation.