Maryland’s merger and acquisition activity slowed slightly in the third quarter of 2013, contrasting with the national direction, and the federal government’s fiscal crises seem to be to blame.
Several experts say uncertainty over what’s happening in Washington has affected the local climate. On the bright side, the influence of federal government activities on Maryland has allowed for continued growth in certain sectors, they say.
In the third quarter of 2013, Maryland’s merger and acquisition market had a total of 55 transactions, according to data compiled by Bloomberg Financial exclusively for The Daily Record.
Bloomberg includes deals in which the acquirer, seller or target was located in Maryland. The quarter showed a notable decrease in completed deals from the same time one year ago, when there were 66, and from the second quarter, when there were 60.
“The third quarter was really quite dull, actually,” said Bill Wiley, senior vice president at Wiley & Associates Inc., a Towson mergers and acquisitions firm. “We didn’t see a whole lot of activity.”
The United States as a whole experienced a 10 percent increase in mergers and acquisitions activity, with 2,632 deals completed in the third quarter.
Maryland’s total reported volume of sales was $2.3 billion, while the national volume was more than $235 billion. However, the number of deals is a more accurate indicator of merger and acquisition activity because companies are not required to report the value of a transaction. Fewer than half of the deals this quarter reported transaction values.
The federal government has cast a shadow of uncertainty on the nearby Maryland market for more than a year now, as leaders in Washington seem to barely avert each financial crisis as it approaches.
“I suspect that the drop-off in Maryland is heavily influenced by the disruption and kind of chaos in the federal government with the budget right now,” said Larry Davis, partner and founder of Aronson Capital Partners, a Rockville-based merger and acquisition adviser. “It’s caused a lot of the acquirers to pause.”
Davis emphasized that this was not simply a short-term matter of this fall’s government shutdown, which began just when the third quarter ended. Since 2011, a series of fiscal deadlines, most recently the federal budget and debt ceiling cutoffs, have been met with temporary continuing resolutions, so sectors that depend on government contracting cannot be sure that those contracts will have a place in the budget.
In 2011, financial uncertainty led to a sharp decrease in mergers and acquisitions. Activity varied throughout 2012.
A year ago, the state of the market was similar to now, said Joe Kinslow, partner at McGladrey LLP’s transaction advisory services division, but at that time, the impending increase in the capital gains tax pushed deals along.
“We don’t have that same impetus this year where companies feel like they have to sell or else,” said Kinslow.
In some markets, however, necessity is outweighing uncertainty.
“I would say we’re still seeing some deal activity with the government contracting sector,” said Kinslow, but “it’s around the companies that still have funding around their major programs.”
This includes technology companies, which made 13 deals in Maryland in the third quarter. Companies with various health care-related products and services have also remained active in the state, according to the Bloomberg numbers and expert accounts.
Growth in health care
“[With] everything from what’s happening with Obamacare and the continued aging population, there’s talk of growth in the health care sector,” said Kinslow.
Ten deals completed in Maryland last quarter involved medicine, pharmaceuticals or biotechnology. These took place largely in the consumer sector, but also in technology and even communications.
Glenn Molin, a senior business adviser for Harvest Business Advisors in Columbia who has a medical background, said that changes in health care law are driving mergers and acquisitions in and related to that market, as medical professionals search for cost-saving strategies amid declining reimbursement rates.
“The key there is economies of scale and efficiencies,” said Molin. “You’re going to run more efficiently and utilize your resources a lot better.”
Molin expects that the health care sector will continually need more efficient processes both in patient care and administrative functions, driving investment and acquisition in technology.
“Medical IT is just a burgeoning field,” said Molin. “It is just such an important space, and there are so many developments coming out.”
The activity is impacting a diverse group of health care-related companies.
For example, Baltimore-based Noxilizer, which produces nitrogen dioxide sterilizers, and Rockville-based IT company Get Real Health both attracted foreign investors in the third quarter.
Maryland entities are making investments as well. Johns Hopkins Hospital acquired a radiation therapy system, and Rockville’s Emergent Biosolutions acquired the Healthcare Protective Products Division of New Jersey-based Bracco Diagnostics Inc.
Even the communications sector has seen some of the action — Gaithersburg-based DecisionHealth acquired health care information companies Contexto Media and Dorland Health from Rockville-based Access Intelligence.
Private equity and small deals
Of the transactions with reported values, only three were in nine figures and one surpassed $1 billion. Large companies seem to be holding back in Maryland.
“I would still say it’s guarded optimism in the market,” said Chris Royston, managing director at Baltimore-based investment banking firm Bengur Bryan & Co. “Generally speaking, the large corporations are holding on to cash,” so deals tend to be “dominated by private equity groups because they need to put money to work.”
Of Maryland’s 55 deals in the third quarter, 17 involved private equity. These deals, and those involving private equity-backed portfolio companies, have not increased per se, but remained stable while larger companies hesitate.
“The private equity is the new source of investment capital,” said Wiley. “We see a lot more smaller private equity firms looking to get into the middle market now.”
Likewise, Maryland’s real estate investment trusts continued to have money to spend. Maryland trusts made six deals in the quarter, including two deals each for Pebblebrook Hotel Trust and LaSalle Hotel Properties.
Smaller deals also tend to be more common recently, said Greg Caruso, principal at Harvest Business Advisors, who deals with transactions between $500,000 and $5 million.
“I’m seeing a real dichotomy between the larger ones and the smaller ones,” he said. “The smaller the deal, the better the rebound.”
Caruso said that in his market, buyers seem more interested recently, and he predicts that sellers will follow in the near future if their valuations improve. Many of those sellers, he said, are business owners in their 50s and 60s, looking for a favorable exit strategy.
“We’re working with owners who are either retiring or they’re retiring from being owners,” said Caruso. “As long as the economy is going better, these people are going to keep holding off, but they don’t want to go through another recession.”
Wiley said he has also noticed an interest from aging baby boomers in dealing with similarly sized businesses.
“We’ve got a wave coming,” said Caruso. “The perfect storm is coming.”
Deals of note
Lockheed Martin acquires Amor Group
Bethesda-based Lockheed Martin bought the privately held Amor for its expertise in international information technology, government services and energy. The terms were not disclosed. Amor employs about 500, compared with Lockheed Martin’s 116,000.
Nielson Holdings N.V. acquires Arbitron Inc. for $1.2 billion
Global information and measurements company Nielson bought the Columbia-based media and marketing research firm Sept. 30, making for the quarter’s largest deal. The acquisition will allow Nielson to more fully monitor the public’s media consumption on television, radio and electronic devices.
Sinclair Broadcast Group buys Fisher Communications Inc. for $339 million
Baltimore-based Sinclair has been regularly active in the mergers and acquisitions market. Its deal with Fisher included 26 television stations in Washington state, Oregon, Idaho and California. The company now owns 149 stations in 76 markets.
Millennial Media acquires Jumptap for $232.9 million
Baltimore-based Millennial, which works in mobile advertising and data, bought mobile advertising platform Jumptap in order to provide an expanded selection of solutions for advertisers and developers. Millennial went public in March 2012, but has struggled in the market since then.