With an increase in cash on corporate balance sheets from last year’s tax reform, expect deal flow activity to accelerate in 2019.
Brien Rowe, an investment banker at D.A. Davidson, said, “We are seeing positive impacts of tax decisions by the Trump administration, and that is playing into a robust market. We ended 2018 with no signs of abatement. The conversations I have had with corporate management and private equity funds — they are making long-term decisions on acquisitions that [many will hold for] three, five and 10 years — suggest that there’s not a whole lot of change.…We see 2019 as a strong year for mergers and acquisitions activity.”
He expects deal activity from both corporate and private equity buyers. “Private equity [firms] have never had as much capital as they have today,” Rowe said. And while interest rates are expected to go up, the banker said “capital is still inexpensive relative to historic numbers.”
He’s seeing growing international interest in firms in Europe, China and Canada. The U.K. isn’t seeing as much interest, but that’s due mostly to concerns over Brexit. For the apparel sector, Rowe said brick-and-mortar will continue to have a tough time, while companies that have a defensible niche will do OK. One example he gave are those companies in the workwear space.
While Rowe expects the market to stay strong, one area that he believes acquirers will pay more attention to is due diligence. “Buyers are willing to pay up, but they are also doing more stringent due diligence,” he said. That emphasis on a deeper dive in due diligence began in 2017 and will continue into 2019 because buyers have learned from past deals that projections sometimes don’t always pan out, he explained.
Matt Tingler, an investment banker at Baird, expects deal interest in the apparel sector to remain strong in 2019. “The alternatives for the cash that’s on the balance sheets are dividends and share buybacks. Most corporations don’t do these because they’re not tax efficient. Buying other brands, for the more mature firms, can create synergies. It’s also more attractive because the younger brands have higher growth rates that can help those companies. I think it’s more likely they choose to do M&A deals,” Tingler said.
As for what they might be interested in, Tingler singled out younger brands that are digitally native from the get-go because they can provide some know-how to the more mature companies. The younger brands can also provide their acquirers with access to a new consumer group, the investment banker said.
And while beauty start-ups have seen strategic buyers swoop in sooner in their life cycle instead of waiting until after an incubation period with a financial sponsor, that hasn’t been the pattern with apparel and accessories firms. Tingler said that’s mostly due to the ease in scaling up for firms in the personal-care and food and beverage sectors. But he thinks that’s starting to change in apparel. Early examples include Walmart’s acquisitions of ModCloth and Bonobos, both in 2017, and PVH Corp.’s purchase of women’s intimates brand True & Co., also in 2017.
And more digitally native brands in the men’s underwear and women’s intimates space could find themselves as targets in 2019. Tingler suggested the more established brands such as Tommy John, Mack Weldon, MeUndies, Adore Me and ThirdLove as ones that could garner some investor attention this year.
Hiccups that could stall M&A deals include interest rates rising faster than expectations, corporate earnings not growing as expected and political turmoil. But so far, Tingler said the clients Baird is working with are “all anxious and eager to do acquisitions. There’s a lot of cash and they want to deploy it. They want growth and to achieve that, they are going after companies that will help them grow.”
A study from Deloitte in December on M&A trends, which gleaned insight from 1,000 corporate and private equity executives focused on mergers and acquisitions, also concluded that one should expect both an increase in the number of transactions and an uptick in the dollar value of the deals in 2019. In general, corporate executives said technology acquisitions no longer play as important a role in corporate M&A strategy, and the focus now instead is on expanding customer bases in existing geographic markets or on diversifying products and services. Furthermore, a third of respondents expect to do more cross-border deals.
According to the Deloitte report, corporate and private equity respondents expect a significant increase in the total annual dollar value of deals at between $500 million and $10 billion.
Divestitures are on track to remain a critical component of M&A activity in 2019. For corporates, reasons include financing needs and a change in strategy or a desire to shed assets no longer fitting a business need. For private equity firms, more respondents said they expect to turn to IPOs for portfolio company exits. Furthermore, the expectation of rising interest rates could trigger deal acceleration activity to act before rates grow even higher.
As for initial public offerings, successful exits in 2019 will help raise even more cash that would need to be put to work, which could help fuel M&A activity later in the year and beyond.
IPO tracking firm Renaissance Capital said 2019 could be the year of the mega IPO. It expects Uber, Lyft and a large backlog of unicorns to “complete some of the largest-ever IPOs.”
IPO count for 2018 saw 190 firms going public, or 30 more than in 2017, with proceeds increasing 32 percent to $47 billion. Private equity was behind 44 IPOs, raising $16 billion, and it was behind three billion-dollar IPOs, including Chinese issuer Pinduoduo. Venture capital backed 87 IPOs, or 46 percent of the total in 2018. The largest VC exits came from Pinduoduo and U.K. fashion site Farfetch.
Other firms on Renaissance’s watch list for a 2019 IPO include Pinterest and Slack. Online women’s fashion retailer Revolve filed in September 2018, and could also finally set terms this year. Jeans brand Levi Strauss is also said to be planning an IPO this year, with Renaissance speculating that it could raise up to $800 million.