Industry Watch

The Golden Exit Gambit

Building wealth through M&A

By Kevyn Burger

Selling your company — or buying someone else’s — can be a tried-and-true way to increase value and build wealth, and it’s never been more true than today. The combo platter that features low interest rates, the availability of debt capital and a strong stock market has whetted the global appetite for mergers and acquisitions.

“The current merger-and-acquisitions (M&A) market has been hot for the past four or five years,” says Omar Akbar, the managing director of Aperion Management, who has built a career structuring, negotiating and advising both buyers and sellers in M&A transactions ranging from $5 million to $1 billion.

With global uncertainty, slow international growth and US GDP growth hovering below 3% for the past decade, Akbar believes that grabbing a company can be an effective way to bust a move in a sluggish economy, and buyers — the private equity firms and large public and private companies — have the funds to go for it.

“Post-recession, corporate profits have returned, and big businesses and small businesses are finding cash on their balance sheets. Many private equity funds are raising their largest pools of committed capital in their history,” Akbar adds. “Buyers are itching to put money to work.”

Global auditing and accounting firm KPMG predicts US M&A activity will hold steady in 2017, with a comparable number of deals as in the previous year. KPMG polled about a hundred corporate and private equity deal leaders across all industries; 84% of the respondents to KPMG’s annual M&A Market Pulse survey aim to complete at least one deal by the end of the year, up from 83% in 2016. Those polled added that they expect 78% of those transactions to be worth $500 million or less.

Some of the most tantalizing deals to hit the market are startups where the founders have taken their company from the garage to the office building and then find a deep-pocketed buyer. The big buyout is the pot of gold at the end of many a startup rainbow.

“A startup is a high-risk endeavor, but entrepreneurs will bear the risk for the payday,” Akbar says. “That’s their exit strategy. They put their blood, sweat and tears in their business and often invest their own money. They’re looking for an event to cash them out.”

Prospecting the American dream

The business pages are full of accounts of such high buck transactions that often bring a fortune to innovators before they hit middle age. The presence of these freshly minted millionaires contribute to the belief that we might all be just one great idea away from wealth. It’s the millennial spin on the Horatio Alger story, where a young worker, blessed with smarts, persistence and a little luck, rises from humble beginnings to achieve great success.

The updated rags-to-riches stories can make such prospects appear attainable for strivers.

“Culturally, we venerate the self-made person, but more people believe it’s possible than it really is. The American dream is a stubborn part of our national narrative, but there’s evidence that it isn’t working as well as it used to,” says Wendy Rahn, a professor of political science at the University of Minnesota who studies public opinion and political participation.

A cherished element of the dream is its potential for upward mobility, with the idea that every generation will do better than the next. But research from the Equality of Opportunity Project, which relies on data from 30 million college students to construct its mobility report card, concludes that children’s prospects of earning more than their parents has been almost halved in the past 50 years, falling from 90% to 50%.

Rahn suggests that converging trends — wage stagnation, a polarized job market, the decline of labor unions — undermine the fundamental faith that the standard of living will continue to rise. “Our cultural understanding of the American Dream emerged at a time when achieving it was more within the realm of possibility.”

The gap between the top and the bottom continues to widen. Every three years, the Federal Reserve Board’s Survey of Consumer Finances collects data about the concentration of American household wealth. Its most recent report finds that the top 1% owns 35.5% of all American household wealth. Furthermore, in 2015, Forbes reported that America’s 20 richest individuals hold more wealth than the combined fortunes of the bottom half of all Americans, which number 152 million.

Conditions that tilt in favor of the affluent leave Rahn concerned about the fate of the college students she instructs at the U.

“The next generation is not accumulating wealth at the same rate their parents did. The government used to do more to promote savings with broad public service campaigns to get people to invest. We don’t see those efforts today,” she notes. “In the growing gig economy that many young people graduate into, the self-employed have less access to company matches and slow-and-steady retirement plans.”

Deals done and undone

Despite the brisk pace of M&A activity, not every transaction closes. According to KMPG’s survey, deals break down most frequently over valuation disagreements, a bidding loss, and financial or operational issues revealed as part of the due diligence process.

Right now, Aperion’s Omar Akbar anticipates special interest in technology and health care businesses, with sub-sectors in those verticals holding appeal to buyers who may be willing to pay a premium for a choice target.

“A sale is a win for all parties. The buyer believes the acquisition can drive growth for their business,” he says. “They buy their future earnings with an acquisition. The seller can start another business or go off and do whatever they want.”