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Bouncing back from the recession

By: Jane Pribek//March 28, 2011//

Bouncing back from the recession

By: Jane Pribek//March 28, 2011//

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Timothy Oleszczuk, a managing director of Grace Matthews, sits at his Milwaukee office. The mergers and acquisitions market is starting to bounce back, he said, which offers new opportunities for his clients. (WLJ photo by Kevin Harnack)
Timothy Oleszczuk, a managing director of Grace Matthews, sits at his Milwaukee office. The mergers and acquisitions market is starting to bounce back, he said, which offers new opportunities for his clients. (WLJ photo by Kevin Harnack)

Mergers and acquisitions aren’t going to support a firm’s entire practice anytime soon, but the market for them is coming back from the depths of the recent recession, Wisconsin firms say.

Things were so bad during the economic downturn that Kevin Eismann of Epiphany Law LLC, Appleton, said he chose to refocus his practice on counseling emerging business clients instead of mergers and acquisitions. Though M&A activity increased “substantially” at the end of 2010, he said, he remains cautiously optimistic.

“We had some motivated sellers and buyers with cash,” Eismann said. “2011 looks like it will be the same, though we’re nowhere near where we were in 2006 and 2007.”

Timothy Oleszczuk, a managing director of Grace Matthews in Milwaukee, said the noteworthy increase in deals in the final quarter of 2010 can largely be attributed to sellers — typically privately held, family-owned businesses  — looking to complete their transactions before an anticipated increase in long-term capital gains tax rates that was expected to take effect Jan. 1.

That momentum tapered off some at the end of the year when it was revealed there would be no increase in the capital gains rates, he said, but it appears 2011 will see a similar steadiness in the M&A market.

“I’m optimistic, but I haven’t seen a real economically-driven turn, as opposed to a tax-related turn, just yet,” said Oleszczuk, whose M&A firm tends to work on transactions in the $20-200 million range.

The market has definitely improved over the recession years, though, said Alexander Fraser of Michael Best & Friedrich LLP in Milwaukee.

“2009 was absolutely stone cold dead,” he said.

Fraser’s banking-oriented practice survived that time by working on other industry issues when the M&A market tanked, he said.

William Abraham Jr. of Foley & Lardner LLP, Milwaukee, said his firm’s M&A practice shrunk in 2008 and 2009 as well, but it’s bouncing back.

“We’re still watching expenses and being a little more careful,” he said. “But if anything, we’re planning on a more aggressive outcome over the next year or two.”

Larger transactions — in the $80-100 million range or higher — have picked up, he said, for two reasons.

“One is that people who are big have a lot of cash and are expanding their footprint. So they’re doing bigger things around the world, especially moving their businesses into what we used to call ‘emerging markets,’” Abraham said. “Second, the big banks — U.S. Bank, Citicorp and people like that — have cash and confidence and haven’t failed. They’re lending pretty aggressively now. So that’s supporting deals in general.”

The market for smaller deals is still spotty, he said, because “they are somewhat dependent on banking relationships.”

Certain industry sectors, such as specialty chemicals, coatings, food, pharmaceuticals and construction services, Oleszczuk said, are being driven by well-capitalized corporate buyers.

“There was a lot of pent-up demand in certain industry sectors,” he said. “For two years, acquirers sat on the sidelines and hoarded their cash. For the last 12 to 14 months, we’ve seen these buyers aggressively pursuing a wide range of targets and paying healthy multiples.”

Deals should continue to increase, Oleszczuk said, as banks continue to lend more.

“Like it or not, transaction volume and pricing is still driven by debt markets and lending multiples,” he said.

“Two years ago, debt for transactions was non-existent. Today, it’s a much different story.

“Lending on deals in excess of $100 million is back with a vengeance, and we’re starting to see some of that trickle down into transactions in the $50 million range.”

In the short-term, Oleszczuk said, this availability of debt capital, along with relatively few transactions in the marketplace, could mean higher prices for sellers entering the market. Lack of deal supply, combined with the new willingness of lenders to put money to work, will lead to higher transaction prices and a willingness to pay more for quality companies.

“Grace Matthews saw this in the end of 2010,” he said, “and is encouraging its sellers to take advantage of it in 2011.”

Jane Pribek can be reached at [email protected].

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