In the last week or so, talks of a recession have become louder, though not everyone agrees that the indicators are pointing toward the big R.
A story in the Wall Street Journal earlier this week pointed out that stocks declined the previous week after the 10-year Treasury yield dropped below the two-year Treasury yield. Inversions of the yield curve have preceded all postwar recessions, the story noted, but not every instance in which this has happened has ushered in a recession. The WSJ authors concluded that these fears are more hype than substance, given the economy’s underlying strength.
What the economy does provide is a reminder that numbers and confidence are quite fluid, and sudden swings can have consequences in the merger and acquisition theater. All things being equal, our panel of M&A participants see more continued, robust activity in the coming year. Beyond that, the crystal ball becomes a little more clouded.
Venture a Guess
Chip Crunk, president and CEO of RJ Young, is heartened by the increase in interest of venture capital firms, as he believes it underscores the viability of the office dealer industry. The question is, how does it play out over the long term?
“The challenge is going to be what’s going to happen in three to five years, because they’re going to want to be out in five years,” Crunk said. “That’s just what their model is. Who is going to be the next player to make that happen? But to me, it’s nothing but a positive sign that they see value in what we’re doing.”
The industry might see a bit of slowing in the degree of activity that’s taken place, according to Jeff Gau, CEO of Marco. He noted the uptick of activity among newer players in the $25 million to $100 million space, and he wouldn’t be surprised to see more companies diversify into a B2B or commercial-type market. He also wouldn’t be surprised to see a business like Best Buy enter the fray.
“Maybe the office supply channel makes sense to me,” Gau pondered. “We actually have a managed print arm that resells in that space. The office supply channel is losing that toner to the equipment dealers who have the service element, so I think we’ll see more of that. That’s a good acquisition for an office supply or office product dealers. They’ve gone through their own consolidation in the last decade or so.
“With private equity, we were in on that early on—our private equity folks like the industry. We’ll probably see some consolidation in that space as well because there are a number of equity players. I think they’ll potentially be in play, too, among the firms.”
Dan Cooper, president and CEO of Novatech, feels the next 12 to 18 months will represent an exciting time for industry M&A. He feels new and increased regional opportunities, along with aggressive private equity growth, will put added pressure on manufacturers to find distributors.
“The leasing companies in the industry will also have to compete more for the business with the larger players,” Cooper noted. “We should also expect to see the consolidation expand into the managed IT services area. These are exciting times, indeed.”
Stars Aligned
Handicapping the M&A market beyond the coming year is difficult considering the cyclical nature of business, notes Dan Ruhl, a principal with Oval Partners. To assume variables will remain static is a tall order for areas such as the economy, the political environment, interest rates, leverage and buyer activity. As we’re already two-plus years into the buying mode, the odds of a change along any of those parameters is strong.
“If any of those variables change, there will still be a lot of fragmented dealers out there but the value of that dealership will be lower,” Ruhl said. “You’ll see dealer transactions because that dealer is thinking about a certain valuation today that won’t be available down the road. If today, all 10 out of 10 variables line up for a very advantageous market for a dealer to move forward with a transaction, will 10 out of 10 be available 15 or 18 months from now? Probably not 10 out of 10. That’s why you’re seeing so many dealers considering alternatives and dealers moving forward with transactions. They’ve seen what the dealer universe looked like 10 years ago, five years ago and now today. Chances are, everything isn’t going to stay as robust as it is right now.”
