A Whiff of Inflation – M&A Valuations Lead the Way

Posted on July 17, 2014

(Originally Published on Axial Forum)

Since the 1970s, many of us have feared the threat of inflation looming just around the corner. Within the past year, economists and central bankers have led us to believe the inflation dragon has been permanently relegated to a dark hole, never to rain fire on the kingdom of men. We’re told that deflation is the real threat and that governments can continually run large deficits without reawakening the dragon. Recently, reality has intervened, however, to remind us that economists and central bankers aren’t infallible. U. S. Core CPI and global consumer prices have taken a sharp turn upward.

While this rate of price increase will have profound implications for business owners if it continues, that’s a story for another day.

Our story here affects these entrepreneurs more directly. Inflation comes as no surprise to those of us in the M&A business. We have watched for some time as the M&A market reheated and deal valuations reached levels not seen since 2007 – the peak of the financial bubble. We now have strong confirmation that this trend is not reserved solely for the megadeals on CNBC.

 

For larger deals that confirmation comes from Pitchbook which reported last week that, for the first half of 2014, average deal valuations reached an all time high of 11.5 times EBITDA.

 

 Median EBITDA Multiples for Buyouts (H1 2014)
For smaller buyouts, the story is the same. Andy Greenberg, CEO of GF DATA®, is in a unique position to understand middle market M&A pricing trends. His company maintains a very comprehensive database of actual transaction values in the sub $250 million marketplace. In our recent interview, Andy shared his perspective confirming our belief that lower middle market M&A purchase multiples have reached historically high levels over the past 12 to 18
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Dell Deal: A Sign Of The Future?

Posted on February 9, 2013

Authored by John Mason

Things are changing in the financial markets. Financial institutions are starting to make money again in mortgages. Money market funds are “flush with cash.” Collateralized Debt Obligations (CDOs) and Collateralized Loan Obligations (CLOs) are staging a comeback.

And, now there is the $24 billion deal by Michael Dell to take his company private. The interpretation of this transaction that I am most interested in is the one being mentioned in almost all the stories coming out in the press: “This is the largest corporate privatization since the financial crisis and the largest tech buyout ever.”

I am not interested so much in whether or not Dell, Inc. (DELL) is eventually saved. What I am interested in is what is happening in finance. It appears as if money is being mobilized again.

Goodness knows, the Federal Reserve has done just about everything it can to push money out into the economy. Comedians have gotten serious about QE1 and QE2 and QE3 … and QEfinity!

It has only been in the past six months or so that there has been any evidence of funds creeping out of the commercial banking system into other parts of the economy. But now, evidence seems to be growing of money flowing into other parts of the economy. This latest transaction, the creation of a large buyout deal, with the growing possibility that others are thinking about more deals, or even mergers and acquisitions, is very encouraging.

Over the past couple of years, myself and others have wondered about all the cash being built up in the coffers of large corporations. It seemed as if these large organizations were piling up cash hoards in preparation for moving in on less well-off institutions and making deals while the getting was good and while interest … read the rest

The JOBS Act and the Future of Commercial Banking

Posted on June 12, 2012

America needs jobs!   That’s a point where there is universal agreement among the political parties.  So much so that Congress overwhelmingly passed the Jumpstart Our Business Startups (JOBS) Act; 390 to 23 in the House and 73 to 26 in the Senate.  My suspicion is the most of those voting for the Act had little idea of how far-reaching the effects of the JOBS Act might be.

The JOBS Act may represent the most radical change in how securities can be privately sold and business capital can be raised from private investors since the securities laws were passed in the 1930s.  Under the JOBS Act most of the restrictions with regard to solicitation that have impeded the growth of a vibrant private placement capital market among accredited investors (i.e. those with liquid net worth over $1 million or incomes over $200,000) have now been removed.

The devil is always in the details and SEC regulations promulgated under the Act could potentially curtail some of its impact.  As written, the JOBS Act has the potential to democratize the financing of business growth in a very dramatic and potentially unintended manner.  By removing many, if not most, of the restrictions on accredited investors seeking to invest in small companies, the JOBS Act provides a basis for many innovative new vehicles for small business financing to blossom.

While most of the commentary around the JOBS Act focuses on funding of startups, the real financing need is to support the expansion of the rapidly growing mid-sized companies that, according to the National Bureau of Economic Research, provide the engine for new jobs in America.  These companies typically have progressed past the startup stage.  They may have 20-50 employees and several million dollars of revenue, with the potential to grow to hundreds if not thousands of employees as … read the rest

January Video Newsletter

Posted on January 26, 2012

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Will Business Owners Hit the Bid in 2012?

Posted on January 24, 2012

Over the years one of the best indicators of M&A activity has been what I call the Free Lunch Index. I live in Memphis, normally not a hotbed of middle market M&A activity.  That’s why my practice is national in scope.  When banks or private equity groups do come to town looking for deals, I often get a call for lunch, breakfast or coffee.

Since the crash in 2008 it’s been fairly lonely out here and I pretty much buy my own lunches. Starting this month, however, I’ve seen a marked pickup in calls and lunch invitations.  The word appears to be out among both the private equity groups and the financial institutions that now is the time to get back into the market and they’re actually spending money to look for deals.

Our experience at Focus indicates that business sale interest has increased strongly since yearend. Apparently we are not alone.  Cyprium Partners, a leading mezzanine financing specialist, recently completed a survey of 175 investment-banking firms throughout the U. S.  Among their findings, 44% of respondents reported more assignments signed or in the market than at a comparable time in 2010.  56% reported that new business pitches were up and less than 10% of the firms reported lower activity.  Bottom line the M&A business is improving and that’s consistent with our belief that the overall economy will surprise to the upside.

It’s no secret that the U. S. private equity industry has been in a depression over the past three years.

Source: Pitchbook

Private equity deal flow showed great promise this time last year, but fell precipitously by the end of 2011.  Interestingly, according to Capital IQ, global aggregate annual deal flow in terms of number of transactions has been far more stable while dollar values have fluctuated widely.

Year                          # of  … read the rest

Gear Up for the Refinancing Wall

Posted on November 14, 2011

Remember the fall of 2009? We had just survived the worst financial crisis since the Great Depression and the stock market was enjoying the early stages of a very powerful bear market rally. We could all breathe a great sigh of relief. Of course a few party poopers were still around to remind us in articles like this one published by the Wharton School that a mountain of debt built up during the bubble years of 2006 and 2007 would need to be refinanced by the middle of the next decade. This debt, measured in the trillions of dollars, encompassed both commercial loans–many generated to support highly leveraged buyout financings–and commercial real estate funding.
Chart: Distribution of leverage loan maturities, 2010-2018
Source: Ancala.com

No need to worry, 2012 was a long way in the future. Well that future is now and Wall Street is again teetering on the brink of panic. Many firms that survived the crash have seen their profits–if not their revenues–return to past highs. Large profitable corporations have successfully refinanced much of their debt with very low cost long term bonds. For much of 2010 and the first half of 2011, strong high yield and leveraged loan markets enabled even middle market firms to stabilize their debt with relatively low cost funding as well. So the question is, “Have we dodged the bullet?”

Unfortunately, two recent reports answer the question with a resounding NO. The Financial Times, in an article entitled “Door Slams Shut for Corporate Have-Nots,” describes a two tier world in which a few very strong companies like Apple Inc. have taken advantage of the recovery to build up tremendous hordes of cash. On the other hand, weaker firms remain overleveraged and at extreme risk in the event of another financial crisis or a material rise in interest rates.

To accentuate the depth of … read the rest

John Gabbert – CEO of Pitchbook

Posted on April 4, 2011

John Gabbert has a unique view of the private equity industry.  As CEO of Pitchbook, he has access to the most intuitive and complete data source for transactions and investors throughout the multi-trillion dollar private equity industry.  We interviewed John from his offices on the Seattle waterfront.  You’ll enjoy the unique environment in which John and his team work, right next to the docks where the tourist boats depart for Puget Sound.  No wonder Seattle has so many entrepreneurs;  in a place like that its hard to define what they do as “work”.

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Overall the interview provides a pretty optimistic view for the M&A market.  The private equity overhang (capital available for investment) remains quite large at approximately $490 billion.

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John reports signs of increasing deal activity as the PEGs put some of this money to work.  Most interesting are his insights on the impact of the deal slowdown on PE portfolios.  Per the slide to the left average PE hold periods have lengthened substantially from around three and a half years in 2007 to over five years today.

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These extended holding periods will likely have a negative impact on compound return rates for some firms.  Equally important they have created a very significant activity overhang for PE firms, which must begin to increase their rate of portfolio exits as funds begin to reach their targeted lives, often seven years or so.

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To download the slide deck (9 megs) click here.

For the full interview (23 minutes), click on John’s picture below.

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George Shea – Private Equity Provides IT Growth Capital

Posted on February 4, 2011

In the linked interview below George Shea, Partner and Information Technology Team Leader at Focus LLC, provides an update on the strong market in information technology deals.  George shares a growing willingness in the Private Equity industry for firms to go beyond their traditional buyout structures to fund recaps that take out earlier stage investors and provide growth equity for their portfolio companies.  This can be a superior option to strategic sales for management teams that want to keep control of their operations.  Additionally George has found an increased willingness among the PE community to consider minority growth equity transactions and other innovative financing options for rapidly growing firms.

To see a the interview, click on the picture or link below:

http://proclaim.netbriefings.com/flv/focusbankers/ko168/focusbankeko168100468/

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Interview with Peter Lehrman – CEO of AxialMarket

Posted on February 4, 2011

When I first started in the M&A business there were a few hundred private equity firms in the U. S. and virtually none overseas.  Getting to know them was relatively easy.  Today there are literally thousands of PE firms in the U. S., hundreds, if not thousands  in Europe, and a rapidly growing complement of Asian and middle eastern PE firms focused on the emerging market countries. Picking the perfect candidate to acquire or invest in any particular lower middle market company has become an overwhelming challenge for intermediaries focused on a good ‘ole boy Rolodex approach to the M&A business.

AxialMarket (www.axialmarket.com) was created to fill that gap.  Axial provides an online marketplace populated by more than 1500 intermediary firms and thousands of PE firms, strategic buyers, family offices, venture capitalists and other qualified private market participants who use Axial’s controlled, trusted marketplace to confidentially source and manage a pipeline of transaction opportunities across the private markets.  Pre-qualified intermediaries have the opportunity to post blind listings of companies for sale or needing financing or recapitalization.  On the buyside PE firms as well as strategic buyers pay monthly subscription fees to have access to thousands of qualified listings.  Axial uses its sophisticated SaaS database to pre-select those buyside firms most likely to be interested in a particular deal.  These firms are then presented to the intermediary for consideration and only approved buyers are permitted to see the deal summaries.  The bottom line is that deals are getting down; more than three thousand business sales, including companies with revenues from $1 million to $400 million have been completed utilizing Axial listings since its inception.

Today we are pleased to have with us Peter Lehrman, the driving force behind AxialMarket.  Highlights of Peter’s interview (4 1/2 minutes) as well as the full interview (about 30 … read the rest

M&A Update Q4 2010

Posted on January 1, 2011

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Global M&A volume (closings) has recovered moderately from a low of $1.8 Trillion in 2009 or about half the market peak of $3.6 Trillion in 2007. We estimate 2010 volume around $2.3 Trillion, up around 28% from 2009.

Source Capital IQ; *2010 Focus Investment Banking Estimate

In the U. S. private equity activity continues to increase, with the likelihood that for the full year 2010 $ invested by PE firms will exceed $100 billion or approximately double the 2009 trough. This number is still down approximately 85% from the 2007 peak.

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Source Pitchbook

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Focus has seen a good recovery in M&A activity in 2010, with total closed M&A transactions expected at 12 for the year compared to 8 in 2009. More important, for consistently profitable companies in favored sectors (e.g. IT services and software) we have witnessed pricing multiples reminiscent of those at the peak. Weak companies battered by the recession on the other hand have had some difficulty getting traction in this market.

Recent activity leads us to believe that the recovery in deal activity will continue into 2011 and may gain strength. We have seen indications that PE firms, essentially absent from the market in 2009, are becoming more aggressive in their activities and more willing to look at firms outside the most popular sectors. This is driven in part by the record level of “dry powder” in the hands of PE firms, approaching $500 billion. At some point this money must be invested or given back to the limited partners.

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Source: Pitchbook

Additionally we see continued strength among strategic buyers that have become quite active in a number of industries. With revenues stagnant in many cases, these firms must look to acquisitions to create the growth expected by equity market investors.

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