Mergers and acquisitions involving equipment leasing and finance companies dipped slightly in 2017 for a couple of reasons. But it was a strong year overall. This year looks promising too yet there are several developments that could affect industry M&A activity and valuations.
James Jackson and Bruce Kropschot of The Alta Group M&A Advisory Practice reviewed 2017 M&As and reported on 2018 prospects for the March-April issue of The Monitor. They noted:
- The comparatively lower M&A activity in 2017 was due, in part, to higher activity in previous years from the sell-off of GE Capital businesses.
- Another factor influencing 2017 M&As was the decreasing number of sizeable independent leasing businesses available to purchase.
- This drove up selling prices in 2017 as strong sellers attracted large pools of buyers.
- 2018 is shaping up to be another solid year for industry M&As.
- Early in the year there are attractive sellers, proactive buyers, positive economic indicators and business optimism.
- However, interest rates, the stock market, tax legislation and accounting rule changes could impact activity and valuations in 2018.
Will rising interest rates encourage buyers to increase return on investment requirements in M&As? Typically, this is the case and it can result in lower valuations for sellers. In March the Federal Reserve announced the first of three interest rate hikes expected in 2018. It is possible interest rate increases could cause some potential sellers to rethink their strategies or delay plans.
On the other hand, prices that buyers are willing to pay for privately owned leasing companies are also influenced by price/earnings multiples in the public stock markets for banks and other financial services. Public company P/E multiples were strong in 2017 and remained so after the February 2018 stock market correction, which has helped buoy private company valuations. If there are significant P/E decreases later this year, though, industry valuations could drop.
The corporate tax rate reduction provided an immediate boost to the valuation of M&A sellers because it will increase their 2018 profitability. Benefits for buyers and sellers resulting from the lowered corporate tax rate should continue long-term. However, the legislation’s limitation on interest deductions could hurt some leasing companies using securitizations and could make acquisitions less desirable for buyers that rely on substantial debt to finance their acquisitions. Other tax-related issues, including the 100% expensing of equipment provision, should also be evaluated before pursuing industry M&As this year.
FASB lease accounting rule changes outlined in Topic 842 have been anticipated for quite some time and are not expected to affect equipment leasing activity or leasing company valuations in a big way. “However, FASB Topic 326 on credit losses will be effective soon after Topic 842 and could have a significant impact on valuations of some equipment leasing and finance companies. Thus, companies would be wise to plan ahead so the new requirements do not have a major effect on their profitability,” Kropschot and Jackson write.
Read The Monitor article for an in-depth look at issues affecting equipment leasing and finance M&As and a list of recent notable transactions in the industry. And, there is more background from The Alta Group’s M&A Advisory Practice at https://thealtagroup.com/mergers-and-acquisitions-2017-and-beyond/.