- in M&A Update
Predictions for 2015
The January issue of Mergers & Acquisitions magazine reported that 2014 was the best year for the middle market since 2007. It went on to say: "Confidence in the economy, cash on corporate balance sheets, dry powder in private equity funds, low interest rates and high stock prices all combined to create a nourishing ecosystem for deals throughout 2014."
Our firm's experience in 2014 was consistent with this thought, and the first 90 days of 2015 have begun with robust buyer activity.
Valuations in Austin
A September 2014 white paper co-authored by Mark Jansen, PhD candidate, and Adam Winegar, at the McCombs Business School, UT Austin, concludes that business valuations in desirable cities such as Austin average 16% more than in other locations. This analysis is based upon a study of over 16,000 transactions. The study states: "The 16% premium is robust to controls for local economic characteristics, industry concentration, and the liquidity and availability of capital in the local transaction market. We introduce a new measure based on how noneconomic characteristics of a city affect its desirability and find that firms located in cities with higher values of our measure sell for a significant price premium."
The paper goes on to explain: "Unlike a public firm, the largest shareholder of a private firm is often the firm's CEO. This makes the location's desirability, even the portion unrelated to the cash flows and risks of the firm, important to at least one of the shareholders of the private firm. In a competitive environment, the entrepreneur pays a premium for a firm in a desirable location and this premium represents the value that the entrepreneur places on desirability."
Austin is consistently on lists of desirable cities in the U.S. The study says: "Using the inclusion of a city on a 'best places' list as our initial proxy for desirability, we find that entrepreneurs pay an economically meaningful 16% premium for firms located in areas that have desirable features that are distinct from local characteristics that would affect firm cash flows or risks. This indicates that entrepreneurs' valuations of private firms are different from valuations of purely financial assets."
The white paper notes that transactions with enterprise values greater than about $20 million, when acquired by a public company or private equity group, do not have this premium.
At Corporate Investment, our conversations with M & A advisors in other parts of the country confirm the results of this study. The velocity of buyers on engagements in Central Texas, versus a transaction in other areas, is also much greater. Buyers from many other areas of the country, specifically California and Illinois, exhibit significant interest in Texas businesses driven by to their desire to relocate to Texas.