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Merger action? Just you wait

A few major deals led Maryland’s mergers and acquisitions activity in the final quarter of 2013, and the deal count crept up slightly. But observers say 2014 will be a year to watch.

“The economic outlook is improving,” said Philip McMann, partner at Rockville-based M&A adviser Aronson Capital Partners. “A lot of companies, in terms of capital deployment, they were buying back their shares or increasing their dividends … [now] they’re looking to make acquisitions again.”

Maryland’s mergers and acquisitions count for the fourth quarter of 2013 was 57, up from 54 in the third quarter, according to data compiled by Bloomberg Financial exclusively for The Daily Record.

Deals of noteThe third-quarter count was previously reported at 55 in The Daily Record, based on Bloomberg’s data, but that has been revised to exclude a deal that closed in November, rather than August as originally recorded.

Nationally, the deal count remained almost the same, with a total of 2,629, one more deal than the previous quarter.

The total transaction value in Maryland came out to $6.76 billion, and the national volume was nearly $300 billion. However, fewer than half of the deals conducted in Maryland reported a value, so the number of deals is a better indicator of overall activity.

Out-of-state buyers

Of the 57 deals recorded, only 23 were acquisitions by a Maryland entity. In the two sectors with the most transactions — consumer and finance — fewer than a quarter of the deals included a Maryland buyer.

Of the transactions with reported values, the biggest deals involved the purchase of Maryland companies by out-of-state entities — both in the communications sector. Cisco Systems Inc. completed its purchase of Columbia-based Internet security developer Sourcefire Inc. for $2.7 billion, and aircraft electronics maker Rockwell Collins Inc. dropped $1.4 billion on Annapolis-based communications and systems engineer ARINC Inc.

“Out-of-state buyers of Maryland businesses is good for Maryland because it means more employment in Maryland and we’re generating more business activity,” said Joel Morse, a financial economist at the University of Baltimore. “In the high-tech sector, we are being noticed and we are being creative.”

Robert Barlett, a Bethesda mergers and acquisitions attorney for Offit Kurman, agrees that the high volume of Maryland targets and sellers is a positive reflection on the state.

“It’s more of a sellers’ market because they’re more attractive companies right now, because companies are performing better,” said Barlett. “The targets are more attractive right now.”

That can create opportunities for Maryland workers, said Charles McCusker, managing partner at Patriot Capital in Baltimore.

“Especially when they’re acquired by a company that isn’t one of the large public companies, I think it opens rising stars to a much greater array of potential,” he said.

For instance, said McCusker, the deal he worked on between Kimmich Software Systems Inc., of Columbia, and acquirer Vistronix LLC, of Reston, Va., would give the local employees greater advancement prospects down the road.

The only downside, he said, is that the state loses out on business tax revenue.

Here to stay

Although the fourth quarter had some big spenders, smaller investments continued to appear, and private equity remained a force in the market.

“It’s good to see activity at that level,” said McCusker. “There are strategic reasons for even small acquisitions. That generally drives economic development.”

More than a quarter of the deals recorded involved private equity, a slight drop from last quarter, but a typical proportion compared to the last year.

“There is a large amount of private equity capital that are looking to make investments,” said McCusker. “I don’t see that stopping anytime soon.”

He expects that between 60 and 70 percent of these private equity deals will be buyouts and the rest will be minority equity investments.

Hot sectors

Nationwide, the technology, media and telecommunications sector was a winner in 2013, scoring more than a third of the national merger market with 775 deals valued at $298.1 billion.

Between technology and communications, Maryland saw 16 deals in the last quarter. Seven of them involved a Maryland buyer.

These two sectors were even more important in the third quarter, when they accounted for 22 of the 54 deals.

“It’s all driven by consumer demand for better, faster, more reliable service,” said McCusker, discussing the telecommunications industry. “Much of that has been developed over the years around the beltway. Those businesses have become an attractive asset for acquirers.”

With a strong technological workforce in Maryland and proximity to the federal government, entrepreneurs in Internet security, cloud computing and related businesses have done well building here. The state has the fourth-highest concentration of tech workers, according to the TechAmerica Foundation’s “Cyberstates 2013” report.

“There’s the cross-pollination of the skills developed on the West Coast with those developed on the East Coast,” said McMann. “They’re looking for capabilities and access to client bases that the venture-backed bases, they don’t have … and they’re trying to quickly scale.”

An example of this cross-pollination, he said, is Cisco’s Sourcefire acquisition.

Improved outlook

Last year was generally quiet, said McCusker, with little M&A activity, but the final quarter began to look up.

“With the relative stability in Washington, business owners and execs are beginning to increase their interest in making strategic investments,” he said.

For more than a year, the uncertainty in federal government action affected business in the surrounding area.

“Previously, there was quite a large falloff in M&A volume as a result of sequestration, lack of clear visibility on budgets and the impact of reduced spending,” said McMann, whose firm focuses on defense and government technology. “Although there has been contraction in spending across the board in those areas, there’s at least now more visibility in the impact.”

Sequestration and federal crises affected not only the federal contractors, but also other businesses that were indirectly or distantly related, said Barlett.

“If Maryland companies are sort of exposed to uncertainty in the area, they’re not going to go out and buy a company,” he said.

Some were spooked by the federal government shutdown, he said — it even put one deal he worked with on hold — but he said his clients are ready to move toward deals again.

“People spent the end of the year planning their next step,” Barlett said. “I do see bigger activity in the first and second quarters of 2014.”

And politics aside, overall economic optimism bodes well for activity.

“I think businesses have recovered or are continuing to recover,” said McMann. “We talk about growth now, and that is the No. 1 strategic initiative. … Acquisitions certainly are on the agenda for discussion.”