Mergers and Acquisitions Commentary

By: Charles Miller, CBA

The following bullet points are excerpts sourced from Strategic M&A Deals: Regions, Sectors and Structures, a May 2011 white paper prepared by Merrill Datasite and The Deal, LLC. In the publication, Merrill Datasite and The Deal surveyed 97 large-cap companies to determine their strategic acquisitions forecasts for the year ahead.

• With the stock market roaring back, companies flush with cash and credit flowing freely, global M&A totaled $608 billion in the first quarter of 2011-a 32.7% jump over the same period last year, according to Dealogic. What’s especially interesting is that most of the deals fueling this increase have been strategic acquisitions by corporates, amounting to more than 90% of transaction revenue.

• While M&A activity has showed renewed signs of life, so far, much of that activity has been concentrated among bigger deals and a handful of dealmakers. Of those who participated in the survey, just 41% say they engaged in an M&A transaction in the first four months of the year. Bankers say they see more dealmakers warming to transactions in the months ahead.

• Information from The Deal Pipeline reflects this move toward bigger deals. According to the data, there were 437 deals in the first quarter, compared with 405 in 2010, with a dramatic rise in large deals: 78 transactions were valued at $1 billion or above in the first quarter, a rise of 23% over 2010. On the other hand, the number of smaller deals has declined so far this year, from 137 deals under $50 million in the first quarter to just 97 this year.

• Costs are a big factor. Nearly half of the respondents say that the price of the target company is the biggest challenge they face in making a strategic acquisition. A further 29% say economic uncertainty is the big challenge, 11% cite availability of financing options, and 4% point to global instability.

• “I think we are getting back to more normalized multiples for acquisitions,” says Andrew Ballheimer, co-head of the global corporate practice at London law firm Allen & Overy LLP. “In the boom market of 2007 and 2008, the multiples were very, very high, and then they dropped to a very low level. Now they are getting back to more normal levels.” Raymond James’ Lane says values have ratcheted down about 25% from their 2007 highs.

• For those who prefer debt, financing is now relatively easy to obtain, compared with the tight money situation following the mortgage crisis two years ago. According to the survey, 68% of executives feel lending opportunities have opened up, while only 32% say that lending conditions remain tight.

• “There’s a more competitive environment now for strategic acquirers than there was in the past,” Curragh says. “While the economy is improving, organic growth is not substantial enough for a number of corporates, which are seeing attractive opportunities for M&A.”
• Technology is the most sought-after sector, with 33% of dealmakers saying they believe the sector is likely to have the largest number of acquisitions in 2011. This was followed by financial services at 16% of respondents, healthcare with 11% and energy at 10%.

• If the executives’ predictions prove accurate, 2011 is slated to be an outstanding year for strategic M&A. While the economic recovery has been lacklustre so far, that has helped keep valuations reasonable and presented attractive buying opportunities to many firms.

In sharp contrast, small businesses (under $5 million in revenue and less than $1,000,000 in loans), seem to be playing in a different ballpark. Big banks’ outstanding loans to small businesses dropped 14% between March 2011 and March 2010 according to an analysis by the Kansas City Federal Reserve Wall Street Journal, Smaller Businesses Seeking Loans Still Come Up Empty.

Only 17% of loan-seeking small businesses landed bank financing over the past six months, as noted in the article. As seen in the excerpts from the Strategic M&A Deals article above, the situation is quite different for larger companies. About 37% of respondents from privately held companies with revenue greater than $25 million have successfully secured bank loans in the last six months.

The Strategic M&A Deals report may exhibit some optimism (possibly over optimistic) in that more deals are getting done and financing is available for the larger deals. Nonetheless, the small businesses seem not to be participating in any improvement in the capital markets as lenders may perceive the small business too risky for investment.