A firm grasp on reality: M&A activity expected to rise

With interest rates dropping, mergers and acquisitions (M&A) professionals are expecting the volume of deals to rise over the next six months.

And at least until the banking environment returns to more favorable borrowing conditions, private equity’s role in M&A activity is expected to remain particularly strong.

That’s among the findings from a survey conducted by Grant Thornton, which itself made headlines when it recently became the latest and largest public accounting firm to partner with private equity.

Grant Thorton’s new M&A Pulse Survey asked 238 M&A professionals — including investment bankers, private equity investors, M&A attorneys, and in-house corporate development team members — to survey the M&A landscape.

Among the findings:

• Eighty-one percent expect deal volume to increase over the next six months, including 10% forecasting a significant increase.

• Three-fourths of M&A professionals said they executed fewer deals over the past year in response to interest rate increases, but 68% expect rates to decrease over the next six months.

• Forty-seven percent plan to increase the size of their M&A teams over the next six months, another telltale sign of what’s to come.

“If these M&A leaders are investing in professionals, that really backs the fact that they expect growth,” Max Mitchell, Grant Thornton’s transaction advisory managing director, said in the report. “They’re hiring ahead of it, or while it’s happening.”

Private equity investment in accounting

Mitchell added that private financing will remain a “pretty strong component” of M&A activity. Forty-seven percent of survey respondents said constraints on the current lending environment will lead to an increase in equity components of financing over the next six months.

That’s certainly the case in the accounting world. Over the past two years, private equity has made significant investments in five top 25 firms, a trend that AICPA & CIMA CEO Barry Melancon, CPA, CGMA, discussed on a recent JofA podcast episode.

“We have an abundance of private-equity funds that are out there and an abundance of capital that’s in private equity,” Melancon said. “Private equity needs places to invest. The CPA profession is very successful. When you have an excess supply of investable capital and you have a successful profession, that’s a basic supply-and-demand equation.”

Melancon went on to discuss the role private equity has played in helping bring fair-market valuation to various aspects of firm culture. In the Grant Thornton survey, 41% of M&A professionals said they expect valuations to increase over the next six months.

“What we’re seeing is firms gravitate to more of a fair value type of process,” Melancon said. “If you become a partner in a firm, it’s a formula that determines what you buy in. If you retire from a firm, what you get paid on the way out is basically formulaic, based on how much you earned in the last several years or whatever the case may be. Some differences at the Big Four level, but that’s basically the case. It’s not a fair-market-value process. No one sits there and says: ‘This is the value of the firm. It’s going to cost you the fair market value to buy in. This is the value of the firm when you retire. This is what you get paid when you leave.’ That is shifting.

“We have a group of Baby Boomers who are now partners. We have seen the world shift with private equity and other types of businesses, other types of verticals, and we’ve seen those be very fair-market-value oriented.”

— To comment on this article or to suggest an idea for another article, contact Bryan Strickland at Bryan.Strickland@aicpa-cima.com.