Friday, July 31, 2009

July in M&A

From WSJ DealJournal, July 31, 2009:
By Stephen Grocer
Every time it seems the U.S. M&A market can’t go any lower, it goes lower. So when will the U.S. M&A market hit bottom?
If we have learned anything in the global financial crisis, it is that calling the market is a quick way to look foolish. Still, one thing is clear from the July data: The M&A market remains in a slump. The total value of announced mergers and acquisitions of U.S. targets was just $23 billion in July. That is off 41% from June, 85% from July 2008 and back to the lows of November and December, when the financial world seemed to be falling apart.
July’s deal volume figures highlight the shrinking role of the U.S. in the global M&A marketplace. For the second consecutive month, U.S. M&A activity was significantly lower than that of both Europe and Asia, with $56.1 billion and $42 billion, respectively. Global M&A volume fell to $137 million from $258 billion in June and $401 billion last July, according to Dealogic.
That is quite a comedown. Historically, the U.S. has been the leading M&A market. A decade ago U.S. deal volume was 16% higher than the combined volume of Europe and Asia and accounted for nearly 50% of all deal activity. But beginning in the M&A boom of 2006 and 2007, Europe began topping the U.S., while other regions began to catch up. In July, U.S. deal volume accounted for just 17% of global activity, according to Dealogic.
One interesting point of note with August marking what is widely considered the two-year anniversary of the beginning of the credit crisis: In the 24 months since, U.S. deal volume has topped $100 billion just four times, according to Dealogic. In the 19 months before that, it came in above $100 billion 11 times.

Wednesday, July 15, 2009

The M&A Confidence Game: No Bottom In Sight Yet

WSJ Deal Journal blog, July 14, 2009, 3:30 PM ET

In a post last week, Wall Street Journal reporter Jeff McCracken put a simple question to the heads of the M&A practices at banks and law firms across New York City: Has the mergers-and-acquisitions market bottomed out?
The answer was a near-unanimous no. (Just one banker said yes.) Among the reasons given was the fact that consumer confidence remains low. Not surprising, of course. The American consumer is the backbone of the economy and with confidence low that average American is unlikely to spend money. That in turn means corporate earnings will remain strained and companies will remain less comfortable doing deals.
But there also is the confidence of another type of consumer to consider–the corporate executive. A recent study by J.P. Morgan Chase and Thomson Reuters found a strong correlation between confidence and M&A. In other words, M&A often is confidence driven rather than opportunity driven. That explains in part why M&A takes off at the same time the economy is strengthening and the equity markets begin to rise.
Those running the companies aren’t all that different from that average consumer. When someone’s 401(k) is soaring and he feels secure in his job, he is more likely to feel comfortable enough to make big-ticket purchases. The same goes for CEOs. With a soaring share price and the company’s future not in doubt, a CEO is more likely to pursue a big acquisition.
So there is a slight bit of optimistic news from a recent study by Ernst & Young. As of last month, corporate executives at more than 570 companies surveyed are feeling, if not a bit more confident at least a little less pessimistic. In January, 82% of executives said the focus of their business was on restructuring to deal with the recession and 74% were looking merely at survival of their present operations. Those figures have since declined to 74% and 65%, respectively.
Still, amid the gloom 69% of the executives surveyed said they were “taking advantage of the recession to pursue new market operations,” an increase from the previous 59%.
In fact, more than a third of executives said business conditions have become more conducive to deal-making. “We have had a lot of our clients tell us that they missed taking advantage of the 2001 downturn,” said Michael Rogers, a principal for Ernst & Young’s Transaction Advisory Services group. “And now with some of their competitors trading at lower levels, they really do need to take a look and see if they can make something happen at this time.”
This isn’t to say an uptick in M&A is around the corner. Many of the executives surveyed don’t expect to see signs of life in the global economy until the second half of 2010 and only 18% of respondents said cash isn’t an issue (down from 25% in January).
“They all say they want to do opportunistic M&A and let’s face it, who wouldn’t want to buy something at a low price or 50% off,” Rogers said. “We love to buy our own personal goods like that, but until we know that our job is safe and our employer is safe, we are not going to make those big-ticket decisions. I think that is the same way a lot of corporations are thinking, because if you do the math, it’s telling you now is the time to try and get deals done.”
So, despite the bluster, it would seem that we’re backed where we started: The M&A market is too linked to overall confidence to show much improvement. Next stop, bottom.
Copyright 2008 Dow Jones & Company, Inc. All Rights Reserved

Monday, July 06, 2009

An End to Management Fees at Buy-Out Shops?

From, July 6, 2009:

With tight debt markets putting the squeeze on the ability of private equity firms to make investments and score profitable exits, the limited partners providing the dealmaking capital have begun pushing back on the fees they've doled out to LBO shops for decades. Squarely in their sights is the 2% management fee that has acted as as an industry benchmark. (Buyouts also typically take 20% of the profits when they sell portfolio companies as well.) Three of the largest limited partners in the world -- giant pension plan the California Public Employees' Retirement System; fund-of-funds AlpInvest Partners NV, Europe's largest backer of private equity; and HarbourVest Partners LLC -- are all pressing for a reduction or end to the fee, according to Bloomberg. With performance down across the board, LPs finally have some leverage of their own when it comes to the fee structure, and the management fee was likely the first to come up because it's paid whether or not the buyout fund turns a profit for its investors. Until now LBO firms have been fairly successful at keeping their fee structures intact, instead making concessions in other areas such as capital commitments. TPG Capital, Permira Advisers LLP and Bain Capital LLC have all allowed their LPs to reduce the size of their capital commitments in megafunds. (The Deal Pipeline subscribers can read the full story here.)And with many LPs facing their own cash crunch, they are increasingly looking to reduce their allocation to private equity. Mark A. Coleman of Laurus Transaction Advisors recently wrote in The Deal magazine about the importance of communicating with LPs on the performance of portfolio companies. He writes: The troubled banking industry and pressure on limited partners to rebalance their investment portfolios, specifically their allocations to private equity, have made it critical that private equity firms be more proactive about keeping these parties informed on how portfolio companies are faring. Many firms have even added senior operating personnel and functional specialists at the fund level to more closely monitor performance and provide on-call support for portfolio company executive teams -- with an overriding objective of preserving value.Additionally, with leveraged lending still tight as drum, private equity firms are finding it very difficult to get profitable exits from portfolio companies. Even worse, the recession has sent a record number of LBO-backed companies into bankruptcy as their debt loads weigh them down and prove expensive to refinance. - George White
See Bloomberg storySeeThe Deal Pipeline story (subscription required)
See The Deal magazine story - Finger on the Pulse
See Dealwatch on PE-backed bankruptcies
See Dealwatch on PE/VC fundraising

Thursday, July 02, 2009

40% Drop in M&A Deals in First Half

From DealBook blog, July 2, 2009:
The dearth of big takeover deals continues in the chilly M.&A. market. The first half of this year, which ended on Tuesday, marked the worst such period for global dealmaking since 2004, according to a new report from Thomson Reuters. The total volume of announced mergers and acquisitions worldwide fell 40 percent from last year to $941 billion, according to the report.
The Thomson Reuters report of a sharp decline in M.&A. activity followed a preliminary estimate by Dealogic last week, which showed that overall deal volume fell 36 percent worldwide in the first half. The two data providers differed somewhat in their methodologies for counting deals.
The biggest transaction of the first half was the drug giant Pfizer’s $68.1 billion acquisition of Wyeth followed by Rio Tinto’s $58 billion bid for rival mining company, BHP Billiton. The federal government comes in at No. 5 on Dealogic’s list of biggest deals with its $25 billion stake in Citigroup.
Private equity firms continued to be relatively silent in the first half with only $32.9 billion in announced global deals, the worst six month period of activity since 1997.
Link to Thompson Reuters report:
– Zachery Kouwe