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Mike Rosendahl
PCE Investment Banking |
State of the M&A Markets - Third Quarter 2009
October 22 , 2009
Merger and acquisition activity continued to increase in 3Q09, although still well off previous highs. This was largely expected as many business owners who were sitting on the sideline at the end of 2008 and beginning of 2009 have started to test the markets. What they are finding are a number of interested buyers are only committing to high quality deals that serve a strategically important purpose or will provide a superior return. While activity continues to increase, there is still a chasm between buyer and seller value expectations. As with all markets, over time, buyers and seller will find the necessary clearing price and activity will improve substantially.
Market Activity
Transaction activity underwent the greatest expansion at the lowest and highest value segments. Deals with an enterprise value less than $50 million increased by 10.4% in 3Q09 versus 2Q09 while transactions over $250 million increased by 80.4% over the same period. The dramatic increase in the $250 million and above segment is largely due to a substantial increase in strategic transactions. Companies with values between $50 million and $100 million decreased 3.6% in 3Q09 over 2Q09 while transactions between $100 million and $250 million dropped 20.9% during the same time frame.
Transaction Volume and Multiples
Source: CapitalIQ / PCE
Valuations continue to improve in nearly all segments. Even though activity decreased in the $50 million to $100 million segment, valuation multiples increased from 5.7x EBITDA to 6.7x EBITDA. Following the same patterns as the transaction activity, valuations in the $100 million to $250 million range decreased from 9.8x EBITDA to 8.8x EBITDA. Valuations for transactions under $50 million and over $250 million underwent modest increases.
Strategic vs. Financial Acquirers
Source: CapitalIQ
Both strategic and financial acquirers became more active in 3Q09 in dollar and volume terms. The uptick in strategic transactions was one of the driving forces behind the increase in volume for deals above $250 million. Strategic acquisitions have continued to improve since its nadir in 1Q09. The expansion in strategic volume might be a sign of the initial stage of a merger and acquisition recovery. Typically, strategic acquirers become most aggressive when they see the opportunity to purchase companies at reasonable levels. This sector should continue to be monitored.
Outlook
Activity continues to pick up and the trends are beginning to look good. Expectations for the 4Q09 and 2010 are improving as strategic and financial acquirers aggressively seek out new targets. Sellers are also carefully reviewing their alternatives as more business owners contemplate their exit strategy. The confluence of these factors will lead to a substantial increase in transactions, but the effects most likely won’t be seen until we are further into the economic recovery.
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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