"The tepid growth of the real economy has conditioned buyers to view expectations of any continued growth more cautiously."
By Rhonda Miller PBN Staff Writer
Bob Rubino is executive vice president and head of corporate finance and capital markets for RBS Citizens. The group includes all corporate advisory, capital markets and debt distribution activities. He also oversees all sponsor and leveraged finance origination, underwriting and portfolio management activities and the strategic acquisition group.
He has been in the financial services industry for more than 25 years.
Rubino is a graduate of Providence College and has a master’s degree from London School of Economics.
PBN: What do you see as the cause for optimism with mergers and acquisitions? Do you see that the landscape in Rhode Island differs much from other New England states?
RUBINO: Rhode Island is no different than any other part of the United States with fundamentals for a more robust M&A environment lining up. The bid/ask differential between buyers and sellers is tightening and more transactions are likely to be announced in the next 12 months.
PBN: What impact does Quantitative Easing have on M&A going forward?
RUBINO: Quantitative Easing, the purchasing of government bonds by the Federal Reserve each month, has supported low interest rates and arguably spurred both the housing recovery and business investment through the billions invested in the U.S. economy. Financial markets have also benefitted. But with Wall Street thriving, expectations on the sell-side of the M&A equation are artificially elevated. The process of taking some of this stimulus out of the financial markets, known as tapering, could moderate stock values and give the private owner a more accurate picture of the value of his or her company. As stock valuations moderate, so will the value expectations of their private peer comparables. This happened back in June and August when the mere discussion of tapering was most pronounced.
PBN: What does this mean for sellers of middle market companies?
RUBINO: Sellers saw good news in the stock market recovery -as prices rose, sellers’ expectations of value also rose. With the Fed’s current monetary policy priming the pump to the tune of billions of dollars each month, market comparables in many sectors have been driven to high levels. As tapering takes hold, there may be a moderation of stock market value, which means there may be a corresponding moderation in the value that sellers of middle market companies hope to achieve. This moderation helps tighten the bid/ask spread between buyers and sellers and as it does, the likelihood for M&A activity increases.
PBN: What does this mean for buyers of middle market companies?
RUBINO: The tepid growth of the real economy has conditioned buyers to view expectations of any continued growth more cautiously. Unlike the financial markets, the real economy has not witnessed the same type of liquidity-fueled growth. Tapering should signal some confidence in the economic recovery, otherwise it would not be pursued. Buyers are beginning to have more confidence in growth rates going forward, encouraging them to bid higher for attractive middle market companies. This tightens the bid/ask spread further, which increases the likelihood of a more active M&A market.
PBN: What are the conditions that will encourage a resurgence in M&A activity? Have they already developed?
RUBINO: A number of conditions for a resurgence in M&A activity are already in place including: 1) Deal capacity is high. Corporate earnings have been solid for several years since the recession of 2008. The growth in corporate earnings has often been supported by business rationalizations and cost-cutting. Many middle market companies, public and private, in Rhode Island and across the country, have used these earnings to build strong balance sheets and significant cash positions. 2) The need for revenue acceleration is great. Organic revenue growth has been challenged since 2009 and is only now showing signs of real recovery. The current low-growth economy provides incentive for growth-oriented companies to use M&A as a vehicle for quickly gaining scale, accessing new markets or enhancing a competitive advantage. 3) Economic forecasts are better and seem more sustainable, which will provide buyers confidence to pursue an acquisition. The economy is improving; real GDP growth hit 2.5 percent in the second quarter of 2013, U.S. exports were up 8.6 percent year-over-year in the same timeframe and consumer sentiment in July this year was at its highest level since 2007.