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

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