Is the M&A feeding frenzy nearing an end?

Over the past five years, we’ve seen one of the most lucrative M&A markets ever. Buyers have extended attractive terms and multiples. And sellers have been able to capitalize on their years of hard work. More important, the steady stream of transactions has created an essentially new market, converging technology, manufacturing platforms, CRM tools, and logistics to enrich the customer experience and provide label and packaging companies with significant new opportunities.

If you haven’t engaged in an M&A play lately, your window of opportunity may be closing. In the next 12 to 18 months, new dynamics may impede your growth, or worse, diminish your value to potential acquirers or investors. If your customer base and sales are locked in by contract or another assurance, you may not be affected. Otherwise, you should consider an M&A play to get in on the favorable market and ensure your longevity. While no one can ever truly predict a change in tides, there are customer and economic indicators that have been pretty accurate in the past. As we head into the end of 2018, we’re seeing more of these. Let’s look at the top indicators of activity/change to the M&A market, and discuss how they might affect you.

Financing. Debt financing is extremely favorable. Not only are interest rates low, but the amount of leverage banks are allowing as a percentage of the sale is the highest in years. This has enabled hundreds of otherwise impossible deals, and a surge of small, private acquirers/entrepreneurs to take advantage and transform their organizations into bigger names or strong acquisition candidates.

Market. Continued M&A deals have decreased the number of players in the industry. But with public company involvement and the push for ‘increased shareholder value’, the appetite for expansion is only more voracious. As everyone seeks the next label or packaging company to buy, the only measurable variable on many transactions has been price. Thus, the market has remained high for transactions, with more interested buyers than sellers.

Growth. Labels’ 3-5 percent annual growth rate has made it a prime acquisition target. This growth rate is not common to the overall market. There are many industries and segments that are flailing. New dynamics and market entrants will likely change this figure, and companies will have to adjust to changing projections.

Success. Most recent label acquisitions by both the strategics and private equity players have performed well. These entities have been wisely targeted, effectively aligned, and well integrated. Seeing this success, new investors have entered the M&A market.

Stable material prices. In recent years, label companies have enjoyed the benefit of operating without significant cost of materials increases. This has resulted in ongoing customer loyalty and consistent revenues and growth. While all of the above exist in today’s market, the question is for how long. There are many signs that we may be tapping out.

Where we’re headed

Financing. As the US Treasury continues to hike interest rates, it will be harder for buyers to pay large multiples and still support the debt load. Add to this, banks are starting to reduce the maximum multiple of debt on transactions. Expect this trend to compound. This will narrow opportunities for all but the best-positioned label companies.

Market. While most investors are still pretty hyped on labels, a few recent transactions have gone awry. (You know who you are.) This means increased scrutiny on new deals, and perhaps a reduction from today’s generous multiples.

Growth. While growth is expected to remain steady, there are factors that may affect future profitability. These include increasing material prices, as well as stiffer competition from the entities formed in M&A transactions. The more capabilities-enhanced, geographically diverse, and technologically advantaged providers will win the bigger volumes over local players. Companies must be prepared to defend their positions against changing competitors.

Success. For many entities, merging, acquiring, or partnering can quickly expand capabilities and ignite growth. But M&A isn’t a guarantee for new value. In some cases, deals can bring misery. As the venue for acquisition candidates tightens, some questionable performers will become new targets, and this is where trouble begins. If you decide to start seeking deals, enlist an M&A advisor to help you evaluate. Make sure they offer proven tenure in labels, as you will need this specific expertise to analyze and execute your best options.

Stable material prices. Base material prices are rising. This will provide for adjustments due to inflationary growth, but it will also elevate pricing pressure. Such upswings can increase competitive bidding, decrease loyalty, and lead to fierce price competition. How prepared are you to face this market trend?

All of these developing dynamics may soon become obstacles. Analyzing such indicators, my best prediction is that the current highly favorable M&A demand will last for another 12-18 months. Should you seek to sell within that time frame, you should be able to make a great deal for your business. If you wish to hold steady, you need to have a very strong plan for your future.

Be prepared and watch the signs. Enlist an M&A advisor to assist you in your determination and positioning. Whether you’re considering buying, selling, partnering, staying, or something else, timing will make the ultimate difference.

This opinion article was first published in Labels & Labeling issue 4, 2018