Your 2019 Merger and Acquisition Forecast

This weekend, you may consider reading one interesting merger and acquisition outlook paper that I recently came across.

The paper was put together by the consultant firm, Deloitte. And I admit, I read a lot of their stuff. They are smart and very well connected in corporate America. They save me from having to go up north and talk to the major players myself. It’s winter after all.

Deloitte interviewed 750 corporate executives and 250 private equity investors about their feeling on M&A activity this year. These are the guys who will be doing the buying and selling, so their opinion is of some importance.

In general, those who observe deal flow think that lower tax brackets, continued low interest rates, and slower economic growth will continue to drive M&A activity.

76 percent of M&A executives at US-headquartered corporations and 87 percent of M&A leaders at domestic private equity firms expect the number of deals their companies will make will increase in 2019.

Today, I want to give you a brief recap of what we can conclude from these expectations…

M&A Activity Looks Optimistic. It Looks Even Better Through This Private Equity Lens

We should also see bigger deals in 2019 as the need to grow earnings against the tax cut comparable numbers from last year works its way up the ladder.

While we know from earlier reports and studies that a large percentage of deals do not actually provide the anticipated growth increase, that’s not going to stop companies from trying.

But most private equity deals, in particular, do end up providing the type of returns anticipated, and we will see more big deals through private equity year. Private equity is no longer a small business.

And that is actually fantastic news for those of us following along with the Heatseekers methodology. I use pretty much the same formulas and financial metrics for picking stocks that both corporate and private equity buyers use to select companies they want to acquire.

We end up with a portfolio of companies that are potential targets for both corporate and private equity buyers. Having a few buyouts at premium prices in the portfolio can help juice returns as we continue on the journey to maximum wealth.

Expect Technological Shifts to Fuel M&A Activity This Year

There is one other change in the M&A world that should be a massive plus for us in 2019. For the past few years, a lot of deals have been about acquiring new technology to make existing businesses bigger, better and faster.

This year, more corporate CEO’s are going to be looking for deals that allow them to gain access to new markets or add new products to their line of offerings. Most of the companies we favor are not cutting-edge technology companies that will be purchased to add tech, but they make products and provide services in specified markets.

We could see a bump up in takeover activity among stocks that fit out ruthless valuation-sensitive approach this year from this shift in attitude.

The corporate types of private equity management though energy, resources, banking, and finance would see increased activity in 2019.

I have been riding the bank consolidation train for years and see no end in sight as smaller banks just cannot keep up on regulatory costs and technology spending. They literally too small to survive and have to sell.

I see this expanding to financial services like brokerages, fund manager, and investment banks as well this year. Fees are declining pretty much across the board at both the corporate and institutional world, so to stay profitable you must increase revenue at a fairly substantial rate.

Low-cost index funds have compressed investment management fees, and we should see lots of deal activity amongst the asset managers. Investment banking fees are also in decline after many years of being fixed at about 7%. The same holds true for IPO fees. To grow fast enough to keep investors happy, financial service companies will pretty much have to buy smaller competitors.

We are using the same rules and calculations to buy stocks that potential acquirers are using. Increased deal activity will be fantastic for us, as we should be able to sell some of our portfolio companies at much higher prices than we paid.

To the max,

Tim Melvin

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