Regulators from the Public Company Accounting Oversight Board (PCAOB) to the Securities and Exchange Commission (SEC) Enforcement Division are turning up the heat on valuations used for financial reporting of private equity groups (PEGs) and publicly traded companies. This increased focus emphasizes the importance to use qualified independent valuation specialists to ensure compliance with existing and changing requirements, along with peace-of-mind for management and investors.
Private Equity (PE) transaction activity in 2013 has experienced a shift back to its historical pattern. Over the past twenty years the PE M&A transactions, both acquisitions and exits, in the U.S. have moved in congruence with PE capital raised except for the period 2010-2012. As the amount of capital raised has increased, so have PE transactions, and as the amount of capital raised has decreased, so have PE transactions. Although there is a correlation between PE transaction activity and PE capital raised throughout the full timeframe of 1995-2013 (R2=0.407, p=0.003)1,2, there is a significantly stronger correlation when the years 2010-2012 are excluded (R2=0.836, p<0.0001) 1,2.
In general, the idea of lending money to our children can bring mixed emotions. Just the idea of putting our dollars into their hands can cause angst. Will the kids use the money wisely? Will they repay the loan as promised? What are the impacts to our own finances? These are all valid concerns under normal circumstances – assuming the children need the money. However, there are reasons to lend to our children that have little to do with their needs. Lending to our heirs is an estate planning tool that works, and the valuation implications can be significant.
America’s power generation capabilities are in the midst of a monumental change that is altering the landscape and natural gas is not the only source creating positive momentum. Renewable energy, and in particular wind, is competing on price with the assistance of the Production Tax Credit (PTC), and should be able to exist without this subsidy in the near future. This improvement in price is causing utilities to take a portfolio approach to their investment in new power generation by diversifying resources.
The President, Congress and supporters originally called the new healthcare legislation the Patient Protection and Affordable Care Act (PPACA). It was then shortened or referred to as the Affordable Care Act (ACA), and is now lovingly or perhaps disparagingly referred to as Obamacare by supporters and naysayers. Whatever you call the law, whatever you think about it, or whatever the final outcome, one thing is for certain, ACA has permanently changed the healthcare industry. The law is driving consolidation among healthcare payers and has spurred change and consolidation among the healthcare supplier and service provider industries.
State of the M&A Market – Q2 2013
Cultivated by the globalization of business and the desire of foreign buyers to access sophisticated markets, the world appeared to have become a much smaller place through mid-year 2008. Buoyed by a soft U.S. dollar, the desire of foreign companies to acquire well-known brands and driven by the need to access advanced technologies, the U.S. became an attractive marketplace for takeover targets. As a result, investments in U.S. targets by non-domestic participants grew as a percent of total M&A transaction volume.
“Stay close to home” appears to be the mantra of most U.S. M&A transactions. Buyers purchased businesses close to home (in the same region) nearly 50% of the time in 2012. This “home proximity” increases to 75% when adjacent regions are included. This data from 2012 is not surprising, as this is a ten year trend in acquisitions. In 2002, 46% of U.S. M&A transactions, with a U.S. buyer and target, involved a buyer and target located in the same region. Between 2002 and 2012, the percentage of intraregional transactions varied slightly, depending on the market; however, it has never fluctuated more than 4% from the 2002 level.
Wind power has a history of boom and bust cycles which has created a significant challenge for investors that are seeking to deploy capital in this sector. Currently, wind is highly dependent on government subsidies that need to be renewed periodically. The most recent extension, which was passed in early January 2013, has created a significant opportunity over the next two years, but what happened at the end of 2012 was very telling.
For a variety of reasons, the acquisition of medical practices by hospitals has become more attractive in recent years. The volume of acquisitions is increasing steadily and therefore physicians and their advisors need to understand the valuation process which drives the purchase price. Almost all hospitals hire a valuation firm that “represents” their interests. We believe that in order to level the playing field, each party should retain their own valuation experts.
Dating back to the mid-nineties, private equity funds have experienced two significant bubbles driven by major economic events impacting capital fundraising: the technology bubble of 2000 followed by the “Great Recession”. As depicted in the graphic below, private equity fundraising peaked at more than $300 billion in 2008 before sliding to less than $70 billion in 2010. Interestingly, the annual average for the past four years was approximately $100 billion and is only slightly below the “bubble” level of FY 2000.