InSight

Exit and Growth Strategies for Middle Market Businesses

M&A in the Business Services Industry – Inflated Valuations

By Kim Levin | Apr 13, 2016

inflated valuations2015 Mergers and Acquisition activity in the Business Services industry was characterized by inflated valuations and a highly competitive landscape.  According to Pitchbook, a data collection platform that covers Private Equity Group (PEG) investment, there were 3,521 transactions worth just shy of $184 billion in the business services sector alone.

To date, private equity firms still remain eager to deploy money sitting on the sidelines into both platform (large base) and add-on (smaller niche) investments in the business services sector.  However, competition from strategic corporate buyers over the past few years has resulted in an uptick on purchase prices for platform size deals and its very much a seller’s market.  Private equity investors are being forced to pick their battles wisely.  When they determine they have an advantage over a corporate investor, you will occasionally see a PEG even overpay for an acquisition in a bidding war if they can envision a positive outcome over the entire hold period.  But with inflated prices comes a more cautious approach to due diligence.  We see the breadth and length of due diligence both increase and deals take longer to close.

Add-on deals offer private equity investors an opportunity to put money to work and many times these transactions can often be negotiated and completed outside the competitive auction process offering shorter closing time frames.  Such deals accounted for 62 percent of all buyouts in the fourth quarter of last year, a historically high percentage.

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