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Weekly UpdatesLast year in these pages I noted that M&A activity was dropping and credit was tightening. Hopefully we have hit the bottom, although that doesn't mean a return to historic levels anytime soon. It took a little longer than expected for the multiples to drop, and no question deals are down. In spite of some who say credit is softening, I don't see many signs of that.
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What is the market for this year? Some deals will continue to get done but at lower multiples than last year. Financing for M & A transactions remains very hard to get and I don't see it coming back very fast.
Private Equity: Private equity still has billions of dollars to put to work and transactions continue to be completed. Estimated dry powder is in the range of $400 billion. Fund raising continues but at a slower rate. "PitchBook" reports that $296 billion was raised in 2008 while only $81 billion has been raised the first half of 2009. Private equity transactions are still getting done but it is much harder. Almost all transactions closed have an owner carryback component. The majority of the private equity community is focusing on addons for existing portfolio companies versus new platforms.
Many private equity groups have focused on working with their portfolio companies, helping them cut costs, find new customers, and get more sales from existing customers. Some private equity groups have scaled back their staff, including Sun Capital Partners and others.
Corporate Strategic Acquisitions: Corporate acquisitions have fared better than private equity acquisitions. Many corporations see this downturn as an opportunity to acquire market share, expand product lines, and gain talent at reduced prices. Healthy corporations have cash and can also get financing for transactions. Strategic acquirers can look at a transaction differently than private equity that needs to reach certain returns.
Foreign Buyers: Foreign buyers seem to remain skeptical of US investments. If you track them over the years in good times as well as bad, many come in strong but end up leaving. For example, Marks & Spencer Group plc in London acquired several companies in the US but sold their last US holding. Kings Supermarkets, in 2006.
Financing: Financing is probably the most difficult issue with all transactions today. What most borrowers will find with lenders is that they are not lending and if they do you won't like the covenants. For a private equity group a transaction has to be very attractive for a lender to consider financing, and even then the lender will expect the private equity group to put in anywhere from 40% to 60% of the price. The private equity groups will also expect the selling owner(s) to carry back some paper. For some groups the requirements are too rich, so they are concentrating on add-on acquisitions that are easier to do because of existing equity in the portfolio company.
The corporate side may afford lenders more protection against losses as corporations may have more in the way of assets and cash flow to cover the debt should a loan go bad.
Either way, bank covenants will be more stringent and banks will be paying more attention to their borrowers. Banks are very cautious about lending and many have scaled back their loan departments. Banks are most likely to focus on the creme la de creme borrowers with a good track record.
Smaller Banks: Some smaller and regional banks that have not been hurt as badly; some have been willing to do some financing for smaller acquisitions.
Non-Bank Sector: The non-bank sectors have become an increasing source of financing for acquisitions. According to "PitchBook," of the top 15 lenders in private equity (by number of financings provided], ten are non-banks or non-bank subsidiaries of banks. Will these sources be able to keep the cash flowing inward so they can lend? CIT became a bank holding company so it could tap into TARP money from the government (as have a couple of others).
Lending: Ultimately, banks need to lend money and the flow will begin again but on a much more conservative basis. Banks today are concerned about the risk of their loans and many are working to shore up their own capital.
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Recapitalizations: I really expected to see more recapitalizations, but I have not seen all that many. It would make a lot of sense with multiples being down, for those owners who would like to take some cash now, and remain a large shareholder. They then can cash out the remaining portion of their interest at a later date, hopefully after the market improves, rather than sell the entire company now at a lower multiple.
Multiples: It is my opinion that multiples have probably hit bottom. Today the multiple is more about financing than it was a year or so ago. Even large companies are not getting big multiples as they once did. I don't see them edging up until financing gets easier.
What is Selling: Business products and services, healthcare, information technology: for the most part, manufacturing is down except for food and food related companies, with construction, building materials and automotive at the end of the list.
2009 isn't going to be a good year for M&A transactions. The collective consensus of most surveys seems to be that the second half will improve and some even think it will explode. I don't think the third quarter will see much improvement but the fourth could see minor increased activity. The M&A market can't come back until the banks and financing sources do. The key to making the right decisions is still through good due diligence, sound thinking, reasonable pricing and good advisors.
Charles K. Oppenheimer is founder, chairman and CEO of Amvest Financial Group, inc. an investment bank advising a wide variety of companies in mergers, acquisitions and corporate finance matters. He also serves as co-vice chairman of Skyview Capital and is a director of Halkon Investments both private equity groups and serves on numerous corporate and advisory boards of privately held companies.
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