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Mike Rosendahl
PCE Investment Banking |
State of the M&A Markets - 2008 Wrap Up and Look Ahead
January 29, 2009
By any measure, the 4th quarter of 2008 was the most difficult any of us have experienced. The collapse of financial pillars such as Lehman Brothers and AIG as well as the financial bailout provided by the Federal government, through the Troubled Asset Relief Program (TARP), stunned most people by the overwhelming affect it had on all sectors of the economy. The result left most people on the sidelines waiting for some normalcy to return. Unfortunately this did not occur. These events as well as others caused a substantial drop in all types of mergers and acquisitions activity.
Acquirers were shaken by the rapid unfolding of events and the near complete freeze in the credit markets. Investors, both strategic and financial, could not substantiate putting money to work until they had a better grasp of the result all of the factors would play on the economy, their industry and the potential target. Corporations were reluctant to make acquisitions fearing that they might need the capital to shore up their current business. The implementation of TARP was supposed to loosen the credit markets and provide much needed liquidity, but the effect has been limited to date. Thus far in 2009, investors appear to have begun selectively seeking acquisitions as fallout from the end of 2008 continues to unfold.
Market Activity
Not surprisingly, deal activity dropped in all segments and value ranges in the 4th quarter of 2008. Strategic and financial acquirers were still active, but not near the levels experienced over the last four years in terms of value or total transactions. Private equity groups represented less than 10% of all transaction measured by both value and number of deals. In terms of total number of deals this is not a surprise. PEGs have consistently hovered around the 10% mark. In terms of value this further cements the substantial drop off in value that began 3Q2007 and highlights private equity’s focus on the middle market.
Strategic vs. Foreign Acquirers
Source: CapitalIQ / PCE
Strategic acquirers should remain more active due to their strong balance sheets and limited reliance on the debt markets to complete a transaction. The lack of liquidity in the debt markets will force the financial buyers to be more selective and focus on more asset rich transactions. This increases the importance for developing a strategic rationale for undertaking a transaction as buyers are approached.
Transaction Volume and Multiples1
Source: CapitalIQ
The effect of the current malaise was felt in all segments of the market with the number of transactions decreasing anywhere from 33% (>$50 million) to more than 63% ($100-$250 million). This dramatic drop off is understandable when the events of September through December are taken into account. An interesting note is transactions under $50 million represented 80% of all deals in the fourth quarter, the highest level in recent history. During this same period, valuations undertook a significant correction. Companies with valuations less than $50 million and more than $250 million suffered the most dramatic drop. The multiples paid for companies between $50 and $100 million is up over the previous quarter, but down from the levels achieved over the last four years.
Outlook for 2009
The outlook for this year is uncertain. Transactions under $250 million should still close in this environment, but at slower pace due to the availability of credit. This will be partially offset by the number of private equity groups moving into the middle market. Already we have observed an uptick in activity. According to PCE’s Distribution Group there were four transactions announced in all of December in this sector. In the first week of January there were six. Hopefully this is a harbinger of things to come.
If you have any questions regarding this article, please contact me at 407-621-2136 or by email mrosendahl@pcecompanies.com.
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