This article is an excerpt from The BCMS Deal Update for August 2019. Get the full pdf here.
LIQUIDITY AND FUTURE INTEREST RATE CUTS WILL SUSTAIN ACQUISITION DEMAND
- Significant levels of cash on corporate balance sheets and equity capital raised by financial sponsors
- Private equity and venture capital firms sitting on ~$1 trillion of “dry powder” (Source: Pitchbook)
- In a low organic growth environment, many companies will look to grow via acquisitions
- The Fed has stated that it will “act as appropriate to sustain the expansion” of the current economy – Fed interest rate cuts in the future will only help to increase acquisition demand
INTEREST RATE CUTS BY THE FED WILL LOWER THE COST OF BORROWING
- The Fed has just announced an interest rate cut of 0.25%, the first in more than a decade
- Many believe the Fed is also likely to cut rates at least one more time before January 2020
- As the cost of borrowing lowers and transaction multiples remain constant, the effective purchasing power of potential buyers increases
TRADE WARS MAY AFFECT VALUATIONS IF MARGIN DEGRADATIONS PERSIST
- Tariffs are increasing operational costs for companies across many industries
- Trump stated on June 29th that, while negotiations continued, he would not increase further the existing 25% tariffs on approximately $250 billion of Chinese goods. In a subsequent tweet on August 1st, Trump stated “The U.S. will start, on September 1st, putting a small additional Tariff of 10% on the remaining 300 Billion Dollars of goods and products coming from China into our Country.” Meanwhile, the Eurasia Group forecasts only a 45% chance that a deal is made between China and the United States before the end of 2019
- Firms will be wary of higher input costs and their impact on profit margins
YIELD CURVE INVERSION MAY SCARE POTENTIAL BUYERS
- The recent 10Y-1Y treasury yield curve inversion suggests an incoming economic recession, which may discourage potential buyers from making acquisitions
- The yield curve inversion is known to precede recessions by anywhere between two to six quarters, which means
- Q4 2019 is likely the earliest time a recession might occur
About the author
BCMS
BCMS is a boutique, international investment bank. We specialize in advising owners of private businesses who are considering a sale of all or part of their company.