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.
Transaction Volume and Multiples 1,2
Notes: 1 – Data only includes transactions with a published value. 2 – Source: CapitalIQ Valuation multiples increased substantially in every segment except for transactions below $50 million, which appears to bolster the case that there is a flight to quality for larger transaction and also highlights the number of distressed deals that are closing. Distressed transactions tend to trade at high multiples, but low values. The largest increase took place in the $50 million to $100 million valuation range. The 20.1x multiple seems exceptionally high in any market and might not be indicative of all the transactions in this value range. The elevated multiple might be due to imperfect information in the marketplace.
While the numbers might not be fully reflective of the market, the trends do reconcile with PCE’s understanding of the current environment. Acquirers are willing to pay up for the right companies, creating strong selling opportunities for businesses that are performing well. Buyers are also benefiting from improving debt markets and strategic and financial investors are holding substantial levels of cash that can be deployed for the right opportunity.
Strategic vs. Financial Buyers 1,2
Notes: 1 – Data includes transactions with or without a published value. 2 – Source: CapitalIQ
In 1Q10, strategic and financial investors decreased the dollar value of their investments, but increased the total number of acquisitions. Financial investors decreased acquisitions dollars by -11.1% in 1Q10 versus 4Q09, while the total number of transactions increased by 3.9%. Strategic investors followed a similar yet more extreme pattern. For strategic investors the dollar value of acquisitions decreased by -28% and total volume increased by 11%. The investment patterns for both these groups demonstrate the focus on smaller transactions.
Interestingly, the two previous charts display contrasting trends in deal volume. The Strategic vs. Financial Acquirers chart includes all transactions with announced or unannounced values and demonstrates an increasing trend. Meanwhile, the Transaction Volume and Multiples chart only includes deals with announced values and is dependent on acquirers publishing details of the transaction. This chart indicates decreasing activity.
Since the Transaction Volume and Multiples chart uses a subset of data from the Strategic vs. Financial Acquirers the trends provided are a less meaningful indicator of overall market movements and only provide a gauge of the volume trend for a particular valuation segment. The Strategic vs. Financial Acquirers charts provides a better overall snapshot of market movements, which shows transaction volume improving.
The first quarter of 2010 has started off slowly, but there are multiple signs that point to transaction momentum picking up as the year continues. First, there are a significant number of deals that are in the market that appear to be moving slowly towards a close. Second, business owners are very interested in speaking to advisors about selling their business. Third, acquirers are actively looking for transactions.
At this stage in the market, struggling companies might find a receptive marketplace, but only at lower valuations. Companies that are performing well might have an opportunity to sell at a high valuation since interest in companies that are performing well and serve good sectors remains strong. Business owners with good companies can’t be forced to sell. When these owners decide they are ready to explore an exit, transaction activity will expand significantly. The acquirers are ready and waiting.
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