Ramsey Goodrich
March 6, 2023
FOCUS: Banking & Finance
Rising interest rates, economic uncertainty complicate M&A outlook, but deals market still active
HBJ PHOTO | STEVE LASCHEVER
Frank Milone is the founding partner of Glastonbury-based accounting firm Fiondella, Milone & LaSaracina, which acquired Connecticut CPA firm Bregman & Co. earlier this year.
By Skyler Frazer
Connecticut has seen a number of notable small- to midsize mergers to kick off 2023, possibly signaling a healthier M&A environment for businesses and private equity firms in the year ahead.
In January, Glastonbury-based accounting and consulting firm Fiondella, Milone & LaSaracina (FML) announced it completed a merger with Bregman & Company. In February, aerospace manufacturers Whitcraft Group and Paradigm Precision announced the completion of their merger and rebranding into Pursuit Aerospace.
In other deals, Hartford-based kitchen cabinet and countertop retailer Express Kitchens bought New Jersey’s Direct Cabinet Sales, while private equity-backed firms in separate deals purchased Waterbury-based GEM Manufacturing and Manchester manufacturer Keystone Paper & Box Co.
Some experts predict M&A activity could pick up this year, after cooling off in the fourth quarter and declining overall in 2022, following a red-hot deals market a year earlier.
Other experts are more cautious, arguing the U.S. and local M&A markets still face headwinds, from the war in Ukraine, higher interest rates, and supply chain and labor issues across several industries.
“Last quarter of last year and into this year so far, M&A has slowed, but there are some bright spots on the horizon,” said Ramsey Goodrich, a managing partner at Southport-based investment banking firm Carter Morse & Goodrich.
M&A landscape
Recent local deals have been driven by different factors.
FML Founding Partner Frank Milone said his CPA firm’s recent acquisition complements its accounting and advisory services with Bregman & Co.’s tax expertise for small businesses and high-income individuals.
Just as important, the deal deepens FML’s Greater Hartford footprint — it already had offices in Glastonbury, Enfield and Stafford Springs — and expands the firm’s reach into Fairfield County. Bregman now operates as a division of FML, retaining its existing Stamford and Avon locations.
“They have a strong focus and presence in two markets where we didn’t have a physical office,” Milone said. “We’re looking for opportunities to find firms that have really high-quality people, but also have strategic locations that can benefit the firm as a whole.”
Following the merger, FML now has more than 120 employees, including 18 partners and 42 certified public accountants. The firm expects to hire additional staff this year, Milone said.
This isn’t FML’s first merger: the company has acquired three other firms in its 20-year history, including two at the start of 2020, before COVID-19 hit in full force.
The pandemic set off a wave of M&A activity, particularly in 2021, when 21,694 U.S. deals were recorded, up 32.4% from a year earlier, and up 43% from 2019, according to data from Ohio-based national lender KeyBank, which has a major Connecticut presence.
“What we saw with COVID is owners of smaller to middle-market companies got tired — it was a strain to keep the business focused, to keep the business afloat — and I think it shed a light on the fact that a lot of their value is still sitting there in the value of their business,” Milone said. “It really pushed them to reassess whether they should cash out, or take some money off the table.”
Ramsey, the investment banker, said 2021 was a record-breaking year and the first three quarters of 2022 remained active. However, deal activity slowed in the fourth quarter as capital markets tightened.
There were 17,904 M&A deals nationally in 2022, according to KeyBank, down 17.5% from a year earlier but still above 2020 and 2019 levels.
“Interest rates started going up, banks stopped lending or really curtailed their lending, and there’s an economic uneasiness throughout the middle market,” Ramsey said.
Ian C. Butler
Ian Butler, a lawyer with Glastonbury-based law firm Brown Paindiris & Scott, said he typically sees an uptick in M&A activity at the end of each year for tax reasons, or because companies want to enter the next year with a clean balance sheet post merger.
“That was noticeably not” the case last year, Butler said.
Valuation gap
One key driver of middle market M&A activity this year and into the future will be the continued graying of business owners, said Bradley Hardy, senior vice president of commercial banking at KeyBank.
Bradley Hardy
“You’ve got a lot of owners who are aging, and they don’t necessarily have a son or a daughter or a family member to whom they’re looking to transition the business to,” Hardy said. “So, in many cases, they’re going to exit that business through a sale to a strategic buyer, or to a financial buyer like a private equity firm.”
FML’s Milone said private equity firms have been sitting on a lot of cash waiting for good value opportunities in the M&A space. That’s why they’ve been particularly active buying up Connecticut firms ranging from small machine shops to insurance agencies.
Firms looking to make a strategic purchase often operate in similar or adjacent industries as their acquisition targets, he said.
However, what’s happened more recently — because of inflation, higher interest rates and overall economic uncertainty — is a disparity in valuations: buyers simply aren’t willing to pay what they previously were pre-pandemic.
“The buyers are seeing more value in buying now because the valuations are going down,” Milone said. “It used to be a seller’s market because the valuations were so high and they could get what they wanted and they were driving the process. Now what we see is that the value has kind of shifted a little bit.”
The gap between buyer’s and seller’s expectations has slowed M&A activity, Hardy said.
Access to capital has also gotten more challenging. Hardy said banks in general aren’t willing to put up as much debt on transactions as they would have a year or two ago, which exacerbates that gap. Lenders are also being more conservative and risk-averse when backing M&A deals.
“We might have been willing to put more debt on a company a year ago or a year and a half ago than we are today, so that has increased the challenge of making loans to support M&A transactions,” Hardy said.
Butler, the Brown Paindiris & Scott lawyer, said reduced M&A activity to close 2022 could be attributed to tougher market conditions and higher interest rates, which makes financing more difficult and expensive, curtailing buyer’s purchasing power.
Some buyers are turning to multiple lenders to finance deals.
“Years ago, the interest rates were very low, and now they’re at least double what they were a couple years ago. So, I would say that’s a determining factor” impacting M&A activity, Butler said.
Milone said buyers right now are targeting well-run companies with quality management teams. Differentiation in product segments is also important, he said, especially for startups hoping to introduce new technologies to market.
“If you’re a good quality company with a good management team and a good product or service or technology, there’s always going to be an opportunity to merge into bigger companies,” Milone said.
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