Favorable M&A Conditions Attracting Buyers and Sellers

This article has been prepared by Bob Dovenberg, Managing Director, and Mark Horvick, an Associate, at Greene Holcomb & Fischer LLC

Turn on any cable news or financial network and you might think we stand at the precipice of another financial collapse. To be sure, the global financial world has its share of challenges, not the least of which is the sovereign debt crisis in Europe and declining confidence in policy makers around the world. Still, the domestic M&A market is extremely robust, with very little indication of a pending calamity. In 2008, the M&A market seized almost immediately after the collapse of Lehman Brothers and the culprit was exceptionally tight credit.  In some cases, the traditional sources of capital for acquisitions exited the market entirely.

Fast forward to 2011, and we aren't seeing the same freezing of the credit markets. In fact, credit conditions remain favorable, and buyers' unprecedented access to capital has brought about strong M&A activity in 2011. Through June of 2011, M&A activity was up on a value basis by more than 50% to $488 billion, compared with $323 billion in 2010. Higher overall M&A deal value was bolstered by several large publicly announced M&A transactions (e.g., T-Mobile/AT&T ($39.0 billion); Duke Energy/Progress Energy ($25.8 billion); Johnson & Johnson/Syntheses ($21.2 billion); AMB Property/ProLogis ($14.8 billion); and Cargill/Mosaic ($14.8 billion)). Overall deal volume remained relatively flat during the first half of 2011 compared with 2010. Still, overall M&A activity remains strong and up substantially from 2008-2009.  In addition, our experience and the experience of many of our peers, suggests that there is still a substantial amount of M&A "product" in the market with very active and ongoing buyer appetite for that product. 

Of particular note is the astonishing level of acquisition capital in the hands of both private equity and strategic buyers. Currently, there is more than $450 billion of committed but undeployed private equity capital. Using historical leverage ratios for private equity deals, this represents more than $1 trillion of buying power. What's more, private equity is highly motivated to spend it. Why?  If they don't, their limited partners are going to want the capital back.  This is the phenomenon that crushed the venture capital industry after the tech bubble ended in 2001.  Not to be left out, strategic buyers had approximately $1.1 trillion of cash on their balance sheets at mid-year, a portion of which could (and probably should) be used for M&A.

Where the economy heads over the next 12 months is anybody's guess. The professional prognosticators certainly have a "downside case" bias and recent reports from large owners of companies like Blackstone suggest August results for many businesses were soft. Volatility in stock markets is also a concern. That being said, when it comes to the overall health of the M&A market, the important market to watch isn't the stock market – it's the debt market. Since the S&P downgrade of the United States, credit spreads have widened somewhat signaling more caution among investors.  However, rates on the underlying bonds (e.g. US treasuries) are down meaning that actual realized borrowing costs for high yield borrowers are only up modestly.      

Sellers of businesses remain active. According to research firm Mergermarket, approximately 35% more companies were for sale during the first half of 2011 than in the last half of 2010.  This rise supports the view that strong M&A activity will continue and may even increase into 2012 despite macroeconomic headwinds. The reasons sellers enter the market are varied. Many businesses now have a firmly established uptrend in their business and the confidence around a sale is higher. Private equity sellers were largely out of the market for two years. Now, these sellers need to successfully exit companies in order to establish the track record needed to raise their next fund.

Our experience at Greene Holcomb & Fisher is consistent with these trends. Our 2010 results were up materially over 2009, and the number of active engagements we have in house is commensurate with 2006 or even 2007 levels. Our "pitch" activity is up as well, as we continue to see an increasing number of sellers wading into to the M&A market. While the exceptionally high valuation multiples of the 2006-07 period haven't returned in most industries, we are still seeing high multiples by historical standards. Moreover, we're seeing robust buyer activity in our auction processes. It's not uncommon to receive 20 or more preliminary indications of interest for high quality companies. Despite the fragility of the overall economy, we are expecting continued strong market driven M&A activity over the short to middle term.