“Even if you are on the right track, you’ll get run over if you just sit there.”
martinwolf Annual Letter
To Clients, Partners, and Friends of martinwolf M&A Advisors!
Happy Holidays, and wishing you a wonderful New Year as we look ahead to 2019.
But first, a few quick notes on 2018. This has certainly been an eventful year—both in a macro sense and for us here at the firm. As in past years, I’d like to take this brief opportunity to reflect on some of the biggest changes we saw or experienced. I hope you’ll join me in doing so.
A Year of Change
The biggest shifts and changes over the course of the last year are of course the ongoing economic uncertainty. This has been a year of renewed market volatility and declining multiples. Growth is not being rewarded and REITs, utilities, and consumer staples are. When I first drafted this letter, market indexes were mixed in terms of year-to-date performance (now, thanks to the Fed, all are in the red). Some economists are even forecasting a recession (and they should know—they’ve correctly forecast 11 of the last 8 recessions!).
But today, I’m not willing to call it just yet. Many broader economic indicators are shifting—oil prices continue to be low, for example—but it’s not as clear-cut as you may assume. In the years since the last economic downturn, the U.S. has invested and led in shale oil production, increasing marginal supply. Today, declining oil prices don’t automatically mean reduced demand and industrial softening.
Naysayers will also point to the inverted yield curve as a sign of rockier seas ahead. This, too, is not without a mitigating factor. Investors have been closely watching the Federal government as it signaled growing comfort with rate increases over the course of the year. Up until 2-3 weeks ago, everyone expected 3-4 rate increases next year with one in December.
This week the Fed acknowledged weakness in the economy but seemingly announced it would continue on its aggressive path forward. At the same time, it would continue reducing its balance sheet. No wonder there’s market whiplash—I expect the actual number of raises next year to be limited to one.
The real “X factor” is “our” cold trade war with China. So far, tariffs have been limited or muted in their direct effects on the multi-trillion-dollar global economy, but overall impact has been huge. It’s not clear to us if the U.S. government is hawkish or dovish. The President of the United States says he’s a “tariff man”—and while a madman theory may have worked for Richard Nixon, it creates a very difficult environment for executives looking to make capital investments or manage and fine-tune global supply chains. Without more clarity, we will struggle to gain our growth footing.
Technology firms—both ours and theirs—are especially vulnerable. And we’re hearing top executives sound the alarm. Tim Cook has denounced tariffs as taxes on the consumer, with Apple executives reportedly considering moving production out of China and passing on additional costs should tariffs grow high enough. Jack Ma has cautioned that trade tensions are the new normal, and that Alibaba and its peers should gird for a 20-year conflict lasting long after Trump leaves 1600 Pennsylvania Avenue.
While this sounds more like a Washington newsletter, politics and policy is what’s driving the direction of our markets. The economy is functioning well, with strong employment, wage growth, and 3% GDP growth– CEOs are sleeping restlessly nonetheless.
Whether these trends continue will determine whether 2019 remains nominally a sellers’ market or becomes a buyers’ market. Today, the market rewards scale–moreso than ever before.
That’s the 30,000-foot level. What does it mean for us?
Well, a few things have changed—transactions are way longer, and are inherently riskier. IPOs continue to decline in popularity (Dell and a few select tech unicorns notwithstanding).
Multiples are decreasing: the S&P historically trades at 17-18x next year’s earnings—now it’s 15x.
But the technology M&A market is healthy, with both strategic and private equity acquisitions of all sizes continuing to create value across multiple industries. 2018 was a year of big deals (and in some cases, bigger surprises), from IBM’s $34 billion acquisition of Red Hat, Cloudera’s $5.4 billion merger with Hortonworks, and SAP’s $8 billion buy of Qualtrics in the last quarter alone. Other standouts included Broadcom’s acquisition of CA Technologies, Microsoft’s surprise purchase of GitHub, and ConvergeOne’s going public and multiple acquisitions.
As economic uncertainty becomes more prevalent, expect today’s furious deal pace to pause. Many companies will turn to private equity funds who need to invest, and strategics who will continue to acquire new geographies and capabilities. Many more will use market conditions as an excuse to maintain status quo. Still, it’s a seller-friendly market—and we’re excited as we look ahead to 2019.
On a Personal Note
I know I say this every year, but this truly has been our busiest year ever. We had and are experiencing a number of notable developments:
- We moved to Scottsdale, AZ after more than 21 years in the San Francisco Bay Area— a move that will allow us to continue to grow and support our global clients with the highest possible service
- We launched our Lower Middle Market Group, a dedicated practice offering comprehensive M&A advisory services specifically tailored to companies with enterprise values of $5 – $30 million in our core IT verticals
- We embodied the “Global” in “Global M&A Advisors” with ongoing activities in multiple countries in Europe, India, and Asia
- We released more than 100 new pieces of Intelligence, including interviews with leading CEOs, same-day commentary on major transactions, longer-term market analysis, and other high-level information
- We were a keynote speaker at one channel conference and met with prospects at several other industry gatherings
- We worked with numerous smart clients on both the buy and sell side, learning about management, corporate strategy, go-to-market focus and sales techniques from real thought leaders in the industry
Which brings me to the most important part of this letter—in which I thank you for your contributions to our success. We would not be where we are today without you—and I hope we have the opportunity to continue to profit together in the new year.
Happy Holidays, Happy New Year, and, as always, Happy Selling! Sincerely,