Will a sequestration solution open the M&A flood gates?

Nearly everyone involved in mergers and acquisitions that I talk to these days is grousing about how hard it is to close transactions.

The main culprit is the uncertainty fueled by sequestration. Will it come? If it doesn’t, there will still be cuts, so what will they look like and where will they be?

In the meantime, the impact, particularly for small and midsize companies looking for a buyer, is delays in contract awards and the possibility of contracts not continuing or ending early when options aren’t picked up.

With these conditions, it is difficult to set a price for the company because no one, particularly the buyer, has confidence in projected revenues.

Traditionally, there is always a conflict between buyers and sellers over value. As a speaker at the recent Morrison & Foerster M&A conference said – my notes are a mess now, so I can’t quote directly – sellers know their business and know their customer. They have more certainty on what the customer is going to buy and how much. Meanwhile, the buyer looks at the macro conditions in the market.

It’s the macro conditions, particularly sequestration, that is filling buyers with doubt about individual company prospects. So, there is a widening gap between what sellers want, and what buyers are willing to pay.

The result is deals aren’t getting done.

So my question is, when sequestration is off the table--and it will move off eventually--will we see a significant uptick in deals getting closed?

I’m not sure. It’ll depend on how quickly seller and buyer expectations reset and move closer together. And how soon that reset occurs likely will depend on which segment of the market we are talking about.

Cyber, health, energy, business transformation, cloud, companies in those segments will likely continue to reap a premium because they are seen as growth areas even with an austere budget.

But if you are in a more commodity-driven part of the market such as basic IT services or the much maligned IT body shop, it might be more of a challenge to realign expectations or even find a buyer.

There also are fewer buyers in the market, according to speakers at the MoFo conference. So, sellers face more competition.

My guess, and it really is a guess, is that it’ll take the first half of 2013 before we see a big change in the pace of acquisitions.

First, we’ll have some sort of transition period to get through, either to a Romney administration or to a second-term Obama administration, so that will delay things across the board.

And second, is the long-term budget trend, which over the next decade will have growth rates closer to the historic levels of the pre-Sept. 11 market than the decade that followed.

So with more sellers and fewer buyers, the onus is on sellers to lower their expectations, rather than buyers to pay more.

Of course, that’s the macro trend. Even in this market, there will always be those outliers, where people say, “Wow, can you believe that they paid that much for so-and-so?”

So for now, it is hats off to those who are closing deals, and good luck and patience to those who can’t.