Despite a sluggish economy, credit crunch and mortgage meltdown, the market for mergers and acquisitions is expected to remain healthy, if only for the next few months, according to Northeast Ohio experts. Today’s economic warnings of a looming recession may significantly dampen M&A deal making in late 2008 and 2009. “This is still a very good time to be a seller of a business,” says Jim Hill, partner and executive chair of Benesch, Friedlander, Coplan & Arnoff LLP.
Hill recently moderated a panel of national private-equity firms at an industry conference. “Every one of those private-equity firms said they were in a buy mode,” he says.
In the M&A middle market — companies valued between $25 million and $1 billion — there are two types of financial buyers, Hill says. The first is private equity firms (buyout funds and hedge funds) that raise money from investors and use those funds to buy companies that promise to produce a strong return on investment over five to seven years. The second type of investor is a strategic buyer looking to purchase companies that will complement and grow an existing portfolio of businesses.
Through December, M&A activity in the United States shattered all previous records, reaching $4.53 trillion, a 20 percent increase over the record set in 2006, according to Thomson Financial, a financial information provider.
M&A deals in 2008 are not expected to reach such heights. In fact, M&A professionals who believe the number of mergers and acquisitions will increase in the first half of 2008 fell to 25 percent (down 13 percentage points from mid-year 2007), according to the Association of Corporate Growth and Thomson Financial DealMakers Survey. Plus, those who say mergers and acquisitions will decline by June more than doubled to 38 percent from 16 percent in mid-year 2007.
Still, John Cook, an M&A attorney for Bricker & Eckler LLP, sees a strong M&A market in 2008 for mid-sized companies. “Money from private-equity firms and other strategic buyers has not slowed down despite the news media reports of a general economic slowdown,” he says.
Although investors are still looking for deals, Hill has noticed lenders are tightening their purse strings because of uncertainties over the U.S. economy. “But selling prices for companies are holding relatively steady — especially for well-performing companies — because there’s still a lot of investment money in the market that needs to be put to work,” he says.
If the economy falls into a bona fide recession later this year or 2009, lending banks and private equity firm investors are expected to pull back even more, which will lower the selling prices for even top-performing companies, Hill says.
“If the economy does slow down in 2008, private-equity firms may have trouble raising new funds for 2009 because investors may decide to tighten their belts,” Cook adds. “My sense is that if we do see an economic downturn, it won’t be steep.”
Today’s credit crisis is having a greater impact on larger-sized buyouts, not middle-market deals, reports Paul Stewart, chairman of the Association of Corporate Growth.
“If the credit situation leads to a recession in 2008, there is likely to be a shift in investment as investors are presented opportunities that require capital to shore up the balance sheets of companies [they invested in],” Stewart says.
The credit crunch means private equity investors and strategic buyers are putting more of their own money on the table versus a lender’s dollars to close deals, explains Hill. As a result, this is expected to lead investors to buy companies with higher annual revenue growth because they are putting more money up front.
“We’re seeing more private equity funds saying they won’t look at a company unless it has annual growth and earnings in revenues of at least 8 to 10 percent,” says Hill. “Some private equity funds are patiently waiting on the sidelines until the [price] expectations of sellers come down.”
Other investors are looking to buy smaller businesses in financial trouble, which can be purchased at lower prices. For strategic buyers, however, higher prices may not be a deal breaker because merging companies with businesses already in their portfolios may produce additional cost savings.
While it may be a good time for business owners to sell their companies, Cook advises that it should not be your only consideration.
“The decision to sell any company, particularly privately held companies, is one of the most agonizing decisions a small-business owner goes through,” says Cook. Market conditions should not be the only factor in selling a business, he adds.
“It has be the right time for the business owners,” Cook says. “If the business owner is not ready to retire, it may not be the right time to sell.”
Nevertheless, if you are considering a sale of your business, there are important steps to take if you want to improve your chances of landing your asking price.
Contingent liabilities — such as supplier troubles, major litigation, recent customer defections or a decrease in client purchases, and major government regulation issues — can affect a company’s asking price. “If you don’t address these types of contingencies, they could cause a potential buyer to decide that he is taking on more risk, which can discount the price for your company,” says Cook.
It’s also important to have your financial statements prepared by a reputable accounting firm and a strong bench of managers who can keep the company growing. In addition, retaining a competent investment banker can work to your benefit and help you make a decision about selling your company and optimizing the selling price.
“An investment banker can take you through a detailed financial analysis and help you determine whether it’s a good time to sell or not, and the type of return to expect given the market and industry conditions,” Cook says. “When it’s not a good time to sell, a good investment banker will tell you that, as opposed to a business broker who will find a buyer whether it’s a good time to sell or not.”