Private Equity and the State of Leveraged M&A

Posted on July 29, 2009

The market for private companies depends on two primary sources of demand, strategic buyers and private equity.  We’ve reported that Focus’s M&A practice has remained strong notwithstanding the recession with six closings year to date.  These deals have all been strategic with our firm representing both buyers and sellers.  Only one of the transactions could be considered a “distressed” deal.  From our vantage point, it appears that in the middle market the strategic buyers neither paid up excessively in the boom, nor have they slashed their valuations unreasonably in the bust.  If the acquisition makes strategic sense, these buyers appear willing to pay a fair multiple that relates more to the impact of the deal on their earnings projections than the state of the financial markets.

Financial deals engineered by private equity firms are another matter altogether.

Total Private Equity Deal Flow


private-equity-deal-flow

Source: PitchBook Data, Inc. (www.pitchbook.com)

According to PitchBook, from the peak in Q4 2007 to Q2 2009, dollar volume of PE deals (including buyouts, growth financings and other) declined almost 96% from $177 billion to $11 billion.  The number of deals declined almost 75% from a peak of 702 in Q2 2007 to 174 in Q2 2009.  PE buyout deals declined even further than overall PE deals, from $168.8 billion in Q4 2007 to $2.6 billion in Q2 2009, a 98.5% decline.   The number of reported PE buyout deals declined almost 80% from 570 in Q2 2007 to 116 in Q2 2009.  This confirms our observation that middle market PEGs responsible for smaller transactions have remained more active than their large deal brethren, but that everyone in the industry has been hit hard.

While there are a number of reasons for the sharp decline in PE activity, most observers agree that the primary issue is the lack of available leverage to fund … read the rest

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Proposed Changes to Estate and Gift Tax – A Wakup Call for Business Owners

Posted on July 29, 2009

Congress and the President appear dead set on creating lasting damage to independent business through ill conceived tax policies. The latest reports show that Congress is planning to solve our health care crisis at the expense of the “rich” with family incomes over $350,000 by imposing a new surtax of as much as 8-9% in addition to other tax increases already in the Obama budget. According to a 2007 Treasury study reported by the Wall St. Journal, fifty percent (50%) of the incomes affected by the new taxes will be generated by the sole proprietorships and Sub-S corporations which are responsible for creating 70+% of the new jobs in the United States.

If anything like the proposed new taxes comes to pass, it may be time for business owners to shift some wealth back to their tax planners and to dust off C-Corporations and tax shelters as areas of strong interest. When considering their options, business owners should take into account the negative (double taxation) impact of tying up their wealth in taxable C-Corps. In our M&A practice, we find that structuring private businesses as C corporations is one of the major impediments to successful exit transactions. Planned increases in the capital gains taxes are certain to make things even worse. For many business owners the best answer may well be to sell now before these overreaching tax law changes make it infinitely harder to realize fair value from their many years of hard work.

Less well publicized are various tax proposals aimed at “reforming” the estate tax laws. In addition to the planned return of the wealth transfer tax following the expiration of the Bush tax cuts, the administration has several surprises in store which could have a major detrimental impact on the ability of business owners to pass ownership … read the rest

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