Mike is an Investment Banker at PCE Investment Bankers, a leading investment bank for mid-market companies. PCE offers its clients a full range of investment banking services including mergers and acquisitions, ESOPs, business valuations, litigation support, growth capital options, fairness opinions, advisory planning, research and stock-index services.
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We often highlight articles from our customers that would be interesting and relevant to the Firmex community. Enjoy this in-depth report by Mike Rosendahl of PCE Companies, on M&A Trends in the Industrial Services Sector.
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America's power sector is at a crossroads. Rising demand for clean forms of power is now juxtaposed against the growing need for inexpensive energy, creating a situation that is increasingly conflicted. Recent economic challenges have made decisions even more difficult for electric power producers. In 2009, electricity generation decreased 4.1 percent, settling at its lowest level since 2003, representing the largest decline in six decades. In addition to the recent economic downturn, expanding environmental policy and increasing prices of certain fuels have forced electric power producers to invest in alternatives to coal such as natural gas. Investment decisions also have been impacted by the recent accident at a nuclear power plant in Japan that, at least temporarily, diminished renewed enthusiasm for nuclear power expansion.
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Americans are a demanding group but, when you cut to the chase, we can live with inconveniences. However, lack of power, and the accompanying implications on our life and lifestyles, would not be among those conveniences we could easily do without. Power is integral to all facets of our lives and, as society evolves, demand for power grows. As a result increasing demand for new and cleaner sources of power creates opportunities for investment as companies expand to meet demand or innovate to produce cleaner or more efficient power.
These are a few of the many reasons why the power sector is among the best long-term investment strategies for investors. Corporations and private equity groups understand this and are actively seeking ways to exploit the abundance of investment being funneled into the this sector.
Companies focusing on and serving the power sector are acquisition targets due to long-term investment that will be undertaken in this sector. Demand for new generating capacity is expected to grow an average of 1.5 percent per year in the U.S. through the year 2030. This sustained level of growth over an extended period of time will force utilities and other companies that generate power to invest in the expansion of current facilities and build new facilities as well as improve the infrastructure that transmits power to businesses and homes.
Today, there is limited or virtually no interest in new investment in coal burning plants, which has forced power generation companies to invest in more natural gas plants as well as seek out alternative forms of power generation including nuclear, wind, solar, geothermal and others. The current focus is primarily on the renewable power segment and with good reason. Corporations and people are taking a more proactive view towards the emissions that everyday life creates. As a result, there is a strong investment thesis for companies that can create innovative ways to reduce carbon emissions. The government has been quick to support this sector with President Obama requesting $8 billion of new federal government investment in his most recent budget proposal, in addition to the current tax credits, grants and loan guarantees.
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Merger and acquisitions transaction activity dropped slightly in the third quarter of 2010 after a strong second quarter performance, almost solely to the decrease in under $50 million transactions. The decrease in activity is somewhat surprising given reports that financial and strategic buyers across multiple sectors are reporting an uptick in deal flow. Business owners seeking liquidity prior to the upcoming change in tax laws is one reason given for the increased deal flow activity. Hopefully the drop is a minor blip that will be offset by significant activity in the 4Q10. Even though activity was off slightly in 3Q10, total transaction volume in 2010 has surpassed the levels achieved during all of 2009. Through the first three quarters of the 2010 total transactions equaled 8,480 versus 8,325 for all four quarters of 2009. This achievement is certainly encouraging considering the challenges 2009 presented, but additional progress will need to be made before a healthy M&A market is achieved.
Transaction activity was mixed with two segments increasing and two decreasing in 3Q10. For transactions between $50 million and $100 million and $100 million and $250 million, activity increased by 7% and 27%, respectively. While at the valuation extremes, below $50 million and above $250 million transactions have decreased by 19% and 7%, respectively. These transaction trends indicate a focus on the mid–size companies as acquirers are seeking meaningful platforms that will help broaden the current focus of their business, enhance penetration of existing markets, offer new avenues for growth and high returns.
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After the 2009 recession, expectations were high for renewed M&A activity coming into 2010. As Michael Rosendahl of PCE Investment Bankers, reports, Q1 2010 numbers were somewhat of a disappointment. Deal volume was highest for distressed companies and companies performing strongly. Companies that fall in between these two categories are having difficulty finding an acquirer. In today’s post, Rosendahl points out that while results were below expectations, the consensus is for an uptick in activity as the year progresses since strategic (corporate) and financial investors (private equity groups) are actively searching for acquisitions.
The first quarter of 2010 started off slower than expected. Nearly all parties were anticipating increased activity for 1Q10, but reality has yet to catch up with expectations. While there are still companies attempting to be sold, the process is taking longer and buyers are more selective. For the companies that are performing well, there is an active market. Companies that are struggling are seeing less interest and lower valuations. In addition, sellers are waiting for valuations and company performance to improve with the hope that they will be able to increase their proceeds from a sale. Today, many business owners are willing to speak about a transaction, but are very slow to move forward.
Transaction activity decreased in all valuation segments in the 1Q10. For acquisitions below $50 million, the decrease was -1.5% versus 4Q09; a negligible drop. Deals in all the other valuation segments sustained more substantial decreases. Transactions between $50 million and $100 million decreased -16.3%, while deals between $100 million and $250 million decreased -25.5%. Additionally, transactions above $250 million decreased by -17.8% in 1Q10. The large decrease in volume with increasing multiples for higher valuation segments is evidence of a point made in a recent article by Mark Aronson, a colleague of mine, who stated that there is a flight to quality for larger transactions.
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