James (Jim Jackson,
Co-CEO and Leader of the Merger and Acquisition Advisory Practice,
The Alta Group
The COVID-19 pandemic, which swept the globe not too long ago, caused hardships for many businesses worldwide and almost ended merger and acquisition activity in the equipment finance sector. Although a few transactions were completed in 2020, most of them were already in progress when the pandemic struck or supported by the fact the seller and buyer had a long-term relationship. These relationships replaced traditional M&A due to travel restrictions and work-from home mandates that made it impossible to conduct on-site due diligence.
The strength of the economy before the pandemic, as well as the deliberate steps taken by both the Federal Reserve and the government to stimulate economic growth, meant that the economy was again well-positioned for a strong M&A environment in 2021. Due to deferred purchases, businesses experienced a spike in equipment demand. The economy also enjoyed low interest rates and record stock market levels, low unemployment levels, high levels of liquidity and access to credit. These factors, together with the directives given by banks and private equity companies to put their excess capital into work, were largely responsible in 2021 being a strong year in the M&A market.
Notable Recent Transactions
Except for a few cases, most M&A transactions of 2021 occurred in second half of the year. TCF Capital Solutions, a division TCF National Bank in Detroit, purchased BB&T Commercial equipment Capital in February 2021. BB&T had previously been part of Truist Banks small equipment leasing and financing business. The transaction included approximately 60 employees, a portfolio of $1 billion of small equipment loans and leases, and a portfolio that included about $1 million of equipment loans and leases. Huntington Bancshares announced in December 2020 that they were buying TCF in an all stock merger for $22Billion.
North Star Leasing, which was acquired in April 2021, became a division within Peoples Bank, a $5 Billion dollar bank based out of Marietta, OH. In April 2021, HPS Investment Partners signed an agreement to purchase Marlin Business Services for $23.50 per shares. This was a 65% premium over Marlin’s closing stock price on April 16, which was $14.24. The transaction was predicated on Marlin’s decision to cease operating as a bank. This condition was met and Marlin announced that funds managed by HPS Investment Partners affiliates had completed Marlin’s acquisition.
On September 24, 2020, Mitsubishi UFJ Lease and Finance Company entered into an agreement to purchase Hitachi Capital’s remaining stake in the company. This all-stock transaction consisted of 571.1million shares of Mitsubishi UFJ Lease and Finance Company. As the management teams look at potential operating synergies, the two companies operate independently within the United States. The merger of the two companies to create Mitsubishi HC Capital was completed on April 1, 2021. The combined entity signed an agreement to acquire CAI International in June 2021. This global transportation company specializes in intermodal container sales and leasing. The company was purchased for $56 per share, or approximately $1.1 million in value.
Sasser Family Businesses signed an agreement in September 2021 to acquire Falcon Lease Holdings (an international container lessor) based in Singapore. In September 2021, North Mill Equipment Finance, Taycor Financial and Aztec Financial purchased 100% of the stock of Aztec Financial’s parent company. Aztec Financial was established in 1997 and focuses on the carpet cleaning, flood, fire restoration, sanitation, pressure washing and work vehicle industries. According to a press statement, North Mill took over the Aztec portfolio of leases and servicing capacities, while Taycor took over the Aztec vendor relationships and origination capabilities.
First Financial Bancorp, a Cincinnati bank holding company with approximately $16billion in assets, signed an agreement to acquire Summit Funding Group. This equipment finance company is based in Cincinnati. Summit, which has approximately 4000 contracts with a portfolio value of $500,000,000, will continue its operations as a subsidiary to First Financial Bank.
Ameris Bank, an Atlanta-based institution with $22 billion in assets acquired Costa Mesa Capital, CA-based Balboa Capital. The online provider of small- and medium-sized business financing solutions, Balboa Capital, in December 2021. Balboa’s online loan technology will be used by Ameris Bank to better serve existing customers and to cross-sell financial solutions across the nation.
BMO Financial Group and BMO Harris Bank, its wholly-owned subsidiary, reached an agreement late in December 2021 to acquire Bank of the West, its subsidiaries and the Bank of the West equipment financing division. The deal was for $16.3 billion cash. BMO has the ability to expand its national offering in California immediately and scale it up.
Charlotte-based Commercial Credit agreed to purchase Keystone Equipment Finance in 2021. Keystone, located in West Hartford, CT, is a company that provides commercial leases and loans to transportation, construction, manufacturing and other industries. Keystone will continue to operate as a fully-owned subsidiary of Commercial Credit, with no personnel changes.
The Current Market
Many of the economic factors which made 2021 an active year in mergers and acquisitions still exist in 2022. M&A activity, company valuations, and credit availability are influenced in large part by portfolio quality, liquidity, access to credit and stock market trends. Interest rates, unemployment rates and political uncertainty all play a role in M&A activity. We should continue to enjoy a strong M&A market, at least until 2022, because of the favorable economic environment.
The government’s efforts in stimulating the economy have played an important role in creating the current economic climate. In March 2020, Federal Reserve cut the Federal Funds interest rate by 100 basis point to target a range from 0% to 0.255%. They also launched a large-scale bond buying program that provides liquidity and capital at low costs. To ensure that the economy did not collapse in the event of a pandemic, the government created multiple stimulus payment programs as well as generous unemployment benefit programs. Easy access to capital combined with low delinquency rates and low credit losses created significant liquidity in banks and large institutions. Investors demanded that this liquidity be used to provide reasonable risk-adjusted returns. Competitive pressures made already thin operating margins even more narrow and created an environment where banks and large institutions wanted to increase their balance sheets and put more capital to work. Many buy-side syndication parties told me that there was little opportunity to buy paper from banks and large institutions that have sold paper in the past. This environment favors M&A activity as banks and other large institutions are looking to expand their balance sheets through acquisition.
Although the economic impact from the pandemic is now over, it gives potential buyers an additional data point to evaluate the experience and quality the senior management team of a potential buyer. Potential buyers can gain a better understanding of the performance of the seller’s portfolio during the first year or so of the pandemic as well the management of the process throughout the deferral period.
Many independent finance companies are starting to work with aging owners to help them plan their estates and transition their businesses to new owners. Many of these owners realize they need to begin the sale process as soon as possible, regardless of any succession plans. This is because they will likely need the ability to continue working, at minimum, after the sale, in order to successfully transition the company and achieve the highest sale price. Because of the favorable economic environment, many owners are open for discussions with potential acquisition partners. However, it is not certain when this cycle will end.
A number of states have announced that they will adopt some form the rate disclosure rules in commercial transactions, which were introduced by California. Banks are generally exempted from the requirements. This means that the cost of compliance, as well as the risk and disclosure burden, will be borne by independent finance companies. This is an added incentive for banks to acquire these services.
Potential Economic Risks
Industry supply chain problems continue to plague the industry. In some equipment segments, large backlogs are creating problems that can impact the timing and level of originations. If this problem continues, originations and portfolio balances could decline and decrease the value of equipment financing companies. It is becoming more difficult to find replacement parts for certain pieces. This is something I have heard from industry professionals. This can cause problems for finance companies that refurbish equipment to resell at lease maturity.
The inflation rate, which is at a 40 year-high, will be one of the biggest economic risks for the equipment finance industry in 2022. The impact of inflation on consumers is evident at the gas station, grocery store, and car dealerships every day. Inflation also affects wages. The Federal Reserve has already stated that it will combat inflation by increasing interest rates starting in March 2022. It also proposed to reduce the amount of bond purchase programs in place to stimulate the economy in the aftermath of the pandemic. The Fed has not disclosed the number of interest rate increases required or the amount of rate increases. However, most analysts believe that the Fed would increase rates three to four more times during 2022. This would result in a total increase of 75-100 basis points in Federal Funds rate.
The impact of interest rates on company valuations and M&A activity is crucial. Potential acquirers who are looking to buy companies will need to increase their hurdle rates for acceptable investments. This results in lower acquisition prices and fewer successful transactions. Potential sellers who don’t hedge their debt balances may experience further margin compression in their fixed-rate portfolios and report lower earnings.
Conclusion
The Alta Group believes that 2022 will be another strong year for M&A activity, based on the level of M&A activity during 2021 and 2022. We are hearing from qualified buyers that many attractive companies are being offered or are in consideration of being sold. I expect the M&A marketplace to remain active in 2022, and that valuations of quality equipment finance businesses will remain strong, barring the larger impact of potential risks described earlier in the article.
About the AuthorJames Jackson (Jim) serves as co-CEO of The Alta Group, and is also the leader of its mergers and acquisition advisory practices. Jackson has over 30 years of experience in equipment leasing finance. He has worked as a senior executive at MicroFinancial/ TimePayment Deutsche Financial Services, AT&T Capital Corporation Leasing Services Services, Signal Capital Corporation and AT&T Capital Corporation Leasing Services. He currently serves on the board of directors for the National Equipment Finance Association.