Dealmakers cautious on 2010 M&A uptick

TheDeal.com, 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