The number of companies growing through mergers or acquisitions slowed beginning in the second quarter but should pick up after the election, says Michael Butler, chairman and CEO of the Seattle-based advisory firm Cascadia Capital LLC.

Butler says although M&A activity isn't at a standstill, strong momentum hasn't happened since early 2012 as attention turned to the U.S. presidential election. The debt crisis in European countries and uncertainty about its potential impact on the U.S. economy also have affected M&A activity, he says.

Cascadia Capital provides advising services for mergers and acquisitions, corporate financing, and strategic planning. It has private and public company clients across the U.S., but mostly in the Pacific Northwest, including a small presence in Spokane.

Butler played a role in the recent acquisition of Prenova Inc., an Atlanta, Ga., energy management company, by Ecova Inc., the Spokane-based Avista Corp. subsidiary.

"Earlier this year, and actually toward the latter part of 2011, we saw a lot of merger and acquisition activity pick up, then right around the beginning of Q2, around April, there was a slowdown," Butler says. "It was more with the corporate companies than private equity buyers, but even the private equity buyers slowed down a bit."

He adds, "It hasn't come to a standstill by any means, but people are more cautious."

However, he expects that as M&A activity picks up in the fourth quarter and likely into the first quarter of 2013, Eastern Washington will have its share of M&A activity as well, he says. "There are some good companies as the market stabilizes," he adds about this region.

Butler says such M&A candidates probably will emerge from the Spokane region's strength in emerging companies involved in energy, early-stage manufacturing, health care, and green technology.

Ecova, Demand Energy Networks Inc., and Purcell Systems Inc. are examples of the type of companies in Spokane that draw attention, he adds.

"I'm not saying these are going to sell, but these are the kind of companies that buyers are going to buy," he says. "I think technology in general is a pretty hot sector. Spokane has more companies, more on the hardware side of technology than the software side. It's primarily in energy and manufacturing."

He adds, "Spokane has a strong critical mass of companies in health care. There are a lot of opportunities for Spokane-based companies to be in demand."

Butler says Cascadia Capital mainly helps private companies do one of two things—access capital or complete the M&A process.

"We've been doing a lot of work for Ecova," he says, adding that Ecova is a "very successful subsidiary" in the energy efficiency arena. "They're right in the sweet spot of where the activity is in the market."

As another bright spot, he says "very early phase" funding is picking up for incubator companies such as those at the Spokane site of Innovate Washington, an agency that takes a statewide, sector-based approach to bolstering technology enterprises, starting with clean energy. It also provides a range of support services to young innovative technology companies in other industries.

"As those companies mature and grow, there will be a good crop of candidates that in three or four years will be formed and ready for M&A," Butler says. "A lot of them are clean tech or technology, health care, and early stage manufacturing ... representative of the Spokane industry segments."

He adds, "You tend to see the silver lining in these downturns. Three, four, or five years later, there are M&A candidates."

IPO upswing

Meanwhile, Butler says he also sees some positive momentum in initial public offerings—the first stock offering a company makes to the public during the conversion to a publicly-traded company from a privately-held entity. While Cascadia Capital doesn't get involved in IPO advising, he watches that activity and talks to bankers.

"We're definitely seeing the IPO bouncing back," he says. "That's going to help a lot. Companies have the option of selling or going public. It makes potential M&A buyers know they have to move or they lose an opportunity to purchase a company because they might go public."

As examples, he points to two tech startups that went public in July—Kayak Software Corp., a Connecticut company, and Palo Alto Networks Inc.

"There are more scheduled, and the pipeline is pretty full," Butler says. "The trend just started back up last week, and people are positive the market window is opening back up."

For the next few months, Butler says M&A action likely will continue at a slower pace.

"The challenges in Europe have made people a little nervous about what might happen to the U.S. economy, and then the second issue as we get into the third quarter is the election," he says.

Looking ahead, M&A confidence will be influenced largely by the fiscal discipline seen in Europe and by the election outcome, he says.

"If Romney is elected you'll see a strong pickup," Butler says. "Even if Obama is elected, you will kind of see a sense of relief."

One positive sign for the M&A landscape is the buildup of infrastructure for natural gas, which Butler says can impact company growth in Eastern Washington, and "Avista could be a very big player."

He adds, "It's phenomenal the amount of money that's going into that infrastructure to build it out, to allow more use of natural gas" for commercial, industrial and transportation uses, including switching vehicles to natural gas use. New businesses are emerging to provide products and services, he says.