November 2012 Capital Matters Newsletter

Posted by John Slater on November 21, 2012

 Will 2013 Witness a Mergers and Acquisitions Boom?

The market for mergers and acquisitions is highly cyclical. After more than 25 years in the business we have seen a lot of ups and downs. Certainly the last 5 years witnessed one of the sharpest declines we’ve witnessed.

Source: Pitchbook

However, recent developments lead us to believe that we could be quickly moving into a period of very rapid recovery that will take the M&A market to new highs both in terms of deal volume and valuations.

In our last newsletter we presented evidence that valuations for good middle-market companies have approached the heady levels seen in the mid 2000s.  Since then we have seen tangible evidence that transaction volume is increasing as well:

•    Axial Market is the leading transaction listing service for middle market M&A transactions.  Axial recently reported a very strong rise in new deal listings in for October 2012

Source: Axialmarket

•    Andrew Ross Sorkin recently publish an article in the New York Times entitled More Money Than They Know What To Do With indicating that the largest private equity firms are expected to become much more aggressive in bidding for mega deals to use their “dry powder” of committed, but unexpended investment funds.  Sorkin indicates that $200 billion of committed capital must be spent over the next twelve months or returned to investors.  As a result he reports that private equity deal volume jumped from $17.1 billion in Q2 2012 to $45 billion in Q3 and that purchase price multiples have jumped in 2012 to 10.6 times EBITDA from 10.3 times EBITDA in 2011.

•    In our own practice we have recently experienced a competitive aggressiveness reminiscent of 2005-2007 between private equity firms competing to buy a large building products distributor that suffered tremendously during the crash, but has recently seen an improvement in its fortunes as the housing market begins to recover.

If this trend continues, 2013 could prove to be a watershed year for nimble business owners who take advantage of the momentum to exit at a superior sale multiple.  The primary drivers of M&A sales multiples are the return on equity required by the capital markets and the amount of leverage available to fund transactions.

Due to the overhang of private equity dry powder, deals are closing at high purchase multiples with historically low levels of leverage.

Interest rates are at their lowest levels since the 1950s.  We have seen indications that banks are becoming more aggressive in their underwriting and this has been confirmed by other observers.  From 2003 to 2010, deal leverage was consistently at or about 50%, but leverage has dropped significantly in 2011 and 2012.  Should deal leverage return to even the bottom of the historical range, an increase of 20-30% in average purchase price multiples would not be out of the question, taking M&A pricing to unprecedented highs. If the current low level of interest rates turns out to be an anomaly, 2013 could prove to be a once in a lifetime window of opportunity to sellers of private companies.

Of course not all business owners are positioned for sale.  As the economy continues to recover, many entrepreneurs will find their firms strapped for the cash needed to fund their renewed growth.  We’ve just contributed to a White Paper prepared by a panel of lenders and financial advisers and published by our friend Todd Sherer of Entreprenuer Growth Capital to assist businesses in raising loans from banks and from alternative financing sources.  There’s lots of good information and advice to be found in this fifty three page publication, which you can download for free at Scribd.
Will 2013 Witness a Mergers and Acquisitions Boom?

(Click on Picture to Watch Video)

Finally on Capital Matters look for new articles from John Mason, one of the most astute observers of the banking markets worldwide.  John reports that, since the crash, the Shadow Banking market has continued to grow and has now reached $67 Trillion worldwide.

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Categories: Banking, Investment Banking, Mergers and Acquisitions, Middle Market, Monthly Newsletters, Private Equity

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