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M&A volume steady in 3Q, outlook bright for 2018

Businesses in Central Pennsylvania finalized 35 mergers in the third quarter of 2017, up from 30 for the same period in 2016, according to Baker Tilly Capital, the investment banking arm of accounting and advisory firm Baker Tilly Virchow Krause LLP.

Five deals reported values, including two closed by The Ames Companies Inc., a Camp Hill-based manufacturer of lawn and garden tools, according to Baker Tilly Capital. The total value of the five deals was $238.5 million.

The largest reported third-quarter deal was the $145 million sale of Hanover manufacturer R.H. Sheppard Co. to a Belgian company.

Ames paid $11.4 million in July for La Hacienda, a United Kingdom-based maker of heating and garden décor products, according to a filing with the U.S. Securities and Exchange Commission from its parent, New York-based Griffon Corp.

In September Ames bought Tuscan Path, an Australian maker of pots, planters, pavers and other garden products, for $18 million, according to the SEC filing.

Ames made another acquisition in the fourth quarter, snapping up Harper Brush Works for $5 million. Harper makes cleaning products for home, profession and industrial use.

The region’s busiest sectors were industrials, representing 28.6 percent of closed deals, and health care, coming in at second at 25.7 percent, according to Baker Tilly. The firm includes the Altoona, Reading, Williamsport and Lehigh Valley areas in its definition of Central Pennsylvania.

M&A activity overall has been steady and is expected to stay that way, driven by a growing economy, relatively low interest rates, abundant capital and high stock prices, said Mike Demers, a managing director at Baker Tilly Capital.

Also in play is pressure on private equity firms to deploy their capital. As of September 2017, private equity firms were sitting on about $945 billion, according to a report by research firm Prequin.

“I think it would be reasonable to expect a good M&A market in 2018,” Demers said.

The market will depend, in part, on how prospective sellers evaluate the potential for a change in economic conditions, Demers said.

Potential sellers must evaluate the trade-off of selling now when the transaction market is favorable and more certain or selling later when their earnings may be higher and the market potentially less certain, Demers said.

Those worried about a turn for the worse economically might decide to sell sooner rather than later, other M&A advisers have said. 

A new cap on deductions for interest expenses, meanwhile, could hamper deals that depend on debt, he said. Under the new tax law signed by President Donald Trump, businesses can deduct interest expenses only up to 30 percent of their earnings before interest, taxes, depreciation and amortization, or EBITDA.

“Interest rates are still low so it’s not going to have a significant impact at this point,” he said. “But at some point there’s a risk that those rates increase.”

The Federal Reserve raised interest rates three times in 2017. It has said it expects to raise rates three times in 2018 and again in 2019.

The rate currently is a range between 1.25 percent and 1.50 percent, but is projected to reach a median of 2.1 percent in 2018 and 2.7 percent in 2019, according to the Fed.

The rate applies to overnight loans banks make to each other but acts as a benchmark for other rates.

Joel Berg
Joel Berg is editor of the Central Penn Business Journal. Born in Philadelphia, raised in Northern Virginia and now living in York, he's a graduate of Franklin & Marshall College and the University of Maryland. Have a question or story idea? Email him at [email protected].

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