07 Jun Premiums Being Paid Due to Supply-Demand Imbalance
We’ve been reporting that premiums are now being paid for businesses that have managed to post decent earnings during the recession. One key reason is there are many more buyers than sellers right now. Lots of buyers fighting to win the few deals available means higher prices.
It’s a sellers market.
The swoon in supply, i.e. companies available for purchase, is due to the recession. Many businesses have performed poorly during the recession and their owners don’t want to sell when earnings have been down. Pretty simple.
On the demand side, the number of buyers has not declined from where it was three and four years ago. The numbers of individual buyers has increased due to layoffs. They’re competing to buy smaller companies. Competing for larger companies are industry (“corporate”) buyers and private equity groups. Sure, some companies have pulled back from the acquisition trail to focus on their own internal problems, but others are out in full force, hoping to pick up some deals at reasonable prices.
Private equity groups are organizations that buy companies. When the economy is bad they have nowhere to go. They have no interest in going elsewhere. What they like to do and want to do is buy good companies.
If private equity group buyers are not buying companies then they are neither making money nor having fun. So, as the numbers of sellers has plummeted over the past few years the private equity groups have seem slow times indeed. Sure, as the recession hit, many hesitated … waiting to see how things worked out … but most are now confident that the worst has been averted and they’re now back at work – buying companies. We’re getting at lease one call a day from private equity groups looking for deals.
If you own a company that has performed well during the recession you can actually get a premium today. That is, secure a price that is higher than you could have gotten two, three, four years ago.