Monday, December 28, 2009

M&A Downtrend Buoyed By Strategic Bargains

Abstracted from: Down But Not Out By: Russ Banham, CFO - Vol. 25, No. 9, Pgs. 50-54
Credit crunch hammers deals.
It comes as no surprise to dealmakers: M&A activity took a precipitous drop in late 2008 and early 2009. Global volume was down over 47% in the first half of 2009, and deal values almost 44%. In the first half of the year, US volume dropped nearly 37%, while deal values plummeted 85%. US volume was down over 40% in the first eight months of 2009, compared to the previous year; August's volume of $13 billion hit a 15-year low. Russ Banham's sources attribute much of this decline to credit's unavailability. Credit has constricted dramatically, and many buyers still have large outstanding loans for acquisitions made before the recession hit. Private equity has $400 billion in credit due by 2014, and no one knows what refinancing options might be available if needed, or indeed what a reasonable current valuation might be. The general lack of available credit has certainly tamped down M&A activity, but the economic climate played an equal role in restraining buyers from making deals.
Uncertain economy clouds decisions.
Buyers are probably not yet ready to bet that the fog has lifted. A number of large companies and private equity firms have stockpiled cash for future acquisitions, but few seem confident about future performance for themselves or their targets if the recession lingers. Performance, in turn, impacts pricing. Many targets today are selling for a fraction of their price a few years ago, but valuations could continue to drop unless the business climate changes. Potential buyers are watching and waiting for a clear bottom so they can buy on the upswing when the economy shows clear expansion. With a new accounting rule—FAS 141 (R)—in place that requires acquirors to publish ongoing valuations of acquisitions, 44% of the executives in one Deloitte survey indicated that they are reconsidering purchases. No one wants to publish results on the downswing. Only the highest probability deals are being pursued, the author reports. Interestingly, these deals are beating the odds: a Towers Perrin study shows that in 204 large global deals occurring between September 2008 and May 2009, 75% of the acquirors are now outperforming their tight-fisted peers by over 6%.
Strategic deals and bargains dominate.
Perhaps those strategic buyers recognized that acquisitions can generate growth when business is otherwise less than robust. Strategic buyers expanded their markets by picking up bargains, such as Radware's $18 million acquisition of Alteon from Nortel, which had paid $7.8 billion for it in 2000. Radware expanded its market and added 10,000 customers for a very cost-effective sum. When targets fit particularly well with the buyer, credit is still available, the author suggests. Beckman Coulter bought Olympus's diagnostic lab business, financing the deal with two notes and a stock offering while still keeping the rating agencies happy. The investors responded positively. M&A activity should rebound as buyers focus on quality, strategic fit, and advantageous pricing; sellers develop realistic exit valuations; and a few more quarters of solid earnings restores buyers' confidence.
Abstracted from CFO, published by CFO Publishing Corp., 253 Summer Street, Boston MA 02210. To subscribe, call (800) 877-5416; or visit

Tuesday, December 22, 2009

Upbeat CEOs to Drive '10 M&A

Dealmakers expect worldwide M&A transaction volume to rise 20% to 30% next year if credit markets stay healthy
By Aleksandrs Rozens and Kelly Holman,
December 17, 2009
The pace of mergers and acquisitions declined this year, but the dollar volume of activity will likely bounce back to over $3 trillion next year, according to an informal survey of the market by IDD. Market participants believe that Wall Street investment banks will see an increase in fee income not only from M&A advisory work but various other engagements like raising money to finance these deals.
The M&A chill eased early in the summer when debt markets were on surer footing. By fall, sentiment in corporate America had improved enough to spark a steady flow of transactions that is expected to carry on into 2010.

Wednesday, December 16, 2009

Tech M.&A. Expected to Rebound After Weak Year

from, December 16, 2009:
Mergers and acquisitions languished in the technology sector this year as company valuations fluctuated wildly with the economy. But with the valuation gap closing and deal activity rising, bankers and corporate executives expect 2010 to be quite a busy year as technology companies seek to raise capital, divest noncore assets and acquire rivals.
To say it has been a quiet year for technology deals would be an understatement. In the first 11 months of the year, there were only 31 technology transactions valued at $1 billion or more, which is less than half the level of the boom years from 2005-2007, according to the 451 Group, a technology investment research firm.
But M.&A. spending in the technology sector is making a comeback. Spending in the second half of the year is running 50 percent higher than the combined spending in the first two quarters. That has been driven by a number of large transactions announced since last summer that probably would have been inconceivable earlier this year, like Hewlett-Packard’s $3.1 billion acquisition of 3Com and Xerox’s deal for Affiliated Computer Services.
The year’s slowdown in deal activity stemmed mostly from the inability of buyers and sellers to agree on a price. It was hard to project future cash flows for companies during the height of the financial crisis earlier this year. Technology start-ups, for example, were being valued at 0.9 times revenue in January but were fetching about 1.4 times revenue by the fourth quarter, according to the 451 Group.
“That’s a not-insignificant increase when compared to where valuations were earlier this year,” the 451 Group said in a research report. “Put into real-world terms, a start-up that was running at $10 million in revenue that sold for $9 million in early 2009 was worth $14 million closer to the end of the year.”
In a survey of industry professionals conducted by the 451 Group, eight out of 10 investment bankers said that the valuation gap would have little or no impact on deal-making in the coming year. About two-thirds of these bankers believe that company valuations will move higher next year and that the higher prices will not deter deals.
But eight out of 10 corporate development executives said that bridging the valuation gap would remain difficult. Nevertheless, the corporate officers still believe that there would be more movement on the part of companies next year on price and that more deals should be expected.
So what kind of deals is the market likely to see? The analysts at the 451 Group believe that there will continue to be a blurring of hardware and software offerings, like in the case of Oracle’s still-pending $7.4 billion acquisition of Sun Microsystems. Companies are trying to control the entire technology value chain now from parts to programs to services, so expect more vertically integrated deals.
There also seems to be a shift in technology alliances as companies move to intergrate across the value chain. For instance, Hewlett-Packard’s $3.1 billion acquisition of 3Com in November would have been almost inconceivable if Cisco Systems hadn’t antagonized its longtime ally by introducing its own blade server a half-year earlier, the 451 Group said. More deals that cross what were sacrosanct division lines between friends should be expected.
– Cyrus Sanati

Monday, December 14, 2009

Looking Ahead to 2010’s Deal Landscape, Monday, December 14, 2009:
Small deals will continue to dominate the mergers and acquisitions landscape in 2010, but their size and number will grow, Ernst & Young said in its annual deal outlook report on Monday.
Cash will remain a major component in acquisitions as the credit markets continue to improve, E&Y said. Meanwhile, the report predicts that private equity firms will reassert themselves as significant players both through opportunistic deals and divestitures of their own portfolio companies.
Only 145 completed deals broke the $1 billion mark in 2009, compared to 400 last year and 609 in 2007. “Mega-deals” of $5 billion or more are likely to be far and few between, E&Y said.
Still, the number of deals is expected to increase in 2010, according to the firm, which surveyed nearly 500 senior executives. Its study found that 25 percent of businesses are likely or highly likely to make an acquisition in the next six months, rising to 33 percent in the next 12 months and 41 percent within the next 24 months.
“We’re seeing signs of life emerge in the deal markets as the decade closes,” Rich Jeanneret, Americas vice chair for Ernst & Young’s transaction advisory services business, told DealBook in an interview.
The E&Y survey found that 53 percent of companies are conducting more rigorous due diligence as potential buyers adopt a more conservative approach to deal-making.
A large number of companies have record-breaking levels of cash on hand. Fortune 1000 companies have more than $1.8 trillion in cash on hand, a $271 billion increase from last year.
And private equity firms have about $400 billion in dry powder, making the leveraged buyout industry well-positioned to strike deals, the report said. E&Y forecasts that these firms will seek to refinance their portfolio companies, or build them through bolt-on acquisitions. Global divestitures may grow in the second half of 2009 as firms look to shed underperformers.
Still, financing will remain an impediment, the study found. About 62 percent of companies cited an inability to borrow enough money as a key issue preventing mergers from being completed in 2009. A loosening of credit markets should help boost deal volume somewhat next year, though the easy money of yesteryear is gone for now.
“While it is likely that deal activity may not return to pre-crisis levels within the next few years, there is some cause for optimism when looking at the three drivers of deal activity: confidence, credit and cash,” Steve Krouskos, Americas markets leader for Ernst & Young transaction advisory services said in a statement.
“Market fundamentals are strengthening, and deal activity is stabilizing,” he added. “Still, the market is full of mixed signals, which are expected to temper recovery.”
While E&Y doesn’t foresee any red-hot sectors ripe for mergers activity, some may see more action than others. The health care industry, for example, may prove popular given the stimulus money available to providers for the meaningful use of electronic health records. Integrated delivery systems, including hospital buying nursing homes and health care agencies, may also continue to grow in popularity.
In the financial sector, deals for asset managers may continue, in the wake of 2009 mergers like BlackRock’s acquisition of Barclays Global Investors.
Software and services companies will remain major targets, especially by strategic players seeking to advance their product portfolios.
– Cyrus Sanati

Tuesday, December 08, 2009

Dealmakers cautious on 2010 M&A uptick, December 8, 2009:
While the M&A environment remains moribund (down 33% over last year), a recent survey by the Association for Corporate Growth and Thomson Reuters found that M&A professionals are guardedly optimistic about a pickup in the first half of next year with strategic deals and distressed sales leading the way.

The twice-yearly survey, which polled 921 investment bankers, private equity professionals, corporate development officers, lawyers, accountants and consultants in October and November, found that negative sentiment about the dealmaking environment hasn't changed over the last year, with 87% saying the environment is fair or poor. Over the next six months, however, the percentage of dealmakers who expect an increase in merger activity jumped to 82% from 56% six months ago.

About 80% of survey respondents identified the current environment as a buyer's market while 74% of respondents said the current market favors strategic investors, and 94% expect strategic investments to accelerate in 2010.

"Dealmaking continues to be caught in the doldrums with limited activity outside of distressed sales and select strategic investments, but the fact that merger professionals express heightened optimism about 2010 is a hopeful sign that a freshening wind will arise," said Dennis White, ACG chairman and senior counsel at McDermott, Will & Emery LLP.

While the credit crunch has decreased in importance as the biggest obstacle to M&A activity, the gap between bid and ask has been rising. And while average middle-market Ebitda multiples have fallen to 8.4 today from a high of 10.1 in 2007, dealmakers are still looking for bargains: 80% expect to pay no more than 5 times Ebitda for companies over the next six months.

"Business owners are slowly realizing that valuations will not return to what they were several years ago. Private equity and strategic buyers are all too aware of this and are patiently waiting for sellers to come to grips with the new valuation paradigm and to take some money off the table," said Harris Smith, ACG immediate past chairman and managing partner of private equity and strategic relationships at Grant Thornton LLP.

Dealmakers expect that healthcare/life sciences, manufacturing and distribution, financial services and technology will experience the most merger activity in the first half of 2010. And while they see improved debt markets, 56% expect more equity in deals, with 54% saying they expect to invest 40% or more in equity.

Of the private equity folks, 54% said they are actively pursuing distressed and undervalued companies, noting that the best opportunities for buyouts include manufacturing and distribution, business services and healthcare/life sciences, and for distressed investing manufacturing and distribution, real estate, consumer products and services, and financial services. Get ready. - Claire Poole

Friday, December 04, 2009

Finally, a Month for Giving M&A Thanks

By Stephen Grocer, WSJ Deal Journal, December 1, 2009:
The recovery in the M&A market may have finally gained some traction.
November ranks as the best month for deal making in more than a year. Global M&A volume hit $287.75 billion, more than double the year-earlier month’s total, according to Dealogic. Of course, November 2008 was the worst month for deal making in the past three years. But last month also marked a 93% increase over October and a 32% jump from September. U.S. deal volume, at $83 billion, more than quadrupled from a year earlier and nearly tripled from October.
More important than the numbers, though, were the signs that recovery in deal making just might be sustainable this time around. November’s M&A activity, for instance, wasn’t dominated by one large transaction. In fact, there were 40 deals valued at more that $1 billion announced in November, the highest total in more than a year, including three deals above $10 billion, according to the data.
That has all been helped by Wall Street’s willingness to once again open its checkbook. Nearly $30 billion in loans were announced this month to fund acquisitions or leveraged buyouts. Eight of the biggest announced financing deals were for heavily leveraged companies, signaling a higher risk appetite at banks.
The takeover battle for Cadbury is a prime example of this willingness to finance deals again. Nine banks have stepped in to provide $9.3 billion in financing commitments for Kraft Foods’ pursuit of the U.K. chocolatier. If Hershey decides to make a rival bid for Cadbury, both J.P. Morgan Chase and Bank of America Merrill Lynch are willing to provide $5 billion apiece in financing.
The willingness to lend also extended to PE firms. Two private-equity deals landed among the top 10 deals last month, and already private-equity deal volume is at its highest levels world-wide since the third quarter of 2008.
As the worst of the Great Recession recedes and stocks contiue to rally, companies are becoming more willing to deal. In a survey published last month by Ernst & Young, a quarter of 490 company executives polled said that they planned to do a deal within the next six months, and a third said they had M&A plans for the next 12 months. That sentiment comes at a time when the ability of firms to increase profits through cost cutting is becoming increasingly limited, leaving M&A as one of the few routes to increase revenue and profits.
That said, there are still dark clouds hanging over the M&A industry. The same Ernst & Young survey found that even though executives realize the present opportunity, 62% feel their ability to act will be constrained by the lack of available financing, among other reasons.