Posted: December 01, 2010
Local dealmakers say M&A market has recovered—almost
A return to near normalcyDavid Lewis
Merger and acquisition deals, like the time and tides, have their own texture and schedule, sense and scent, ebb and flow, except when they don't.
Just a couple of years ago time stopped, and there was no tide. The economy had suffered a coronary, and nobody knew what anything was worth.
Autumn 2008. Remember?
Selective memory is a wonderful thing.
Now near-normalcy is the new normalcy. Mergers and acquisitions are going on again in an almost normal fashion. Companies can be valued. Industry sectors have settled into categories including the good, the really great, the bad and the really ugly.
Even the homebuilding business has helped add to M&A activity, with its near-collapse and inevitable consolidation sparking combinations of Toll Brothers Inc. with Coleman Homes Inc.; Centex Homes with Wayne Homes; and Lennar Corp. with Winncrest Homes.
Let us drill down.
A look at Colorado merger-and-acquisition statistics reveals ... practically nothing. Fifty-nine Colorado companies closed deals in third-quarter 2010, according to Norwalk, Conn.-based FactSet Research Systems Inc., compared to 58 in the second quarter of 2010 and 60 in the third quarter of 2009.
A second glance, however, reveals the shocking and incredible fact that the Colorado M&A tracked by Mergerstat fell more than half, to $500 million from $1.1 billion in the third quarter of 2009. These numbers, however, reflect about one-quarter of all Colorado M&A tallied by the company, and in the somewhat murky world of privately held businesses coming to terms these are indicators more than solid statistics.
Still, they tell a story.
It's just as well to rely on the anecdotal evidence from local deal professionals. They say that the statistical indications of flatness and falling-ness are utterly misleading: The M&A market has recovered, just about.
Depending, that is, on a mid-sized list of variables, qualifiers and conditions.
Still, the experts say the basic conditions on the ground are: The economy is rising, albeit more slowly and uncertainly than people might like; post-election, there is less anxiety arising out of Washington; both strategic buyers and private equity groups have lots of capital to deploy (some estimate as much as $1 trillion); and good purchases are available, while many entrepreneurs are happy to sell at this juncture.
"The market is improving; it is not back to where it was, but it is improving," says Wes Brown, managing director for Denver-based St. Charles Capital. "And it is very dependent on the industry group."
"As we know, M&A activity tracks the economy. When the economy is good, lots of deals are done, and reasonable to frothy multiples are being paid," says Ned Minor, president of Denver-based Minor & Brown in Denver and an attorney who specializes in M&A transactions. "All the deals that we've done in 2010 - in the 30 (transactions) range, which is kind of where we were in 2009 - these are all good companies that have sold for more than reasonable prices."
"The market is clearly significantly better than it was a year ago, although it has still not returned to the levels of 2005, 2006, 2007," says Warren R. Henson, president and senior managing director of Denver-based investment banker Green Manning & Bunch. "The data would back that up, and that's what we're seeing in terms of deal flow."
One funny thing about today's mergers and acquisitions marketplace is that it seems as if, like two teens in the back of a car, there is pent-up demand on both the buy and sell sides.
On the side of buyers and tire-kickers, there is plenty of dough or, to use the technical terminology, mazuma, shekels, drachmas, moola, loot and lucre.
"There are some unusual phenomena going on in the marketplace, the kinds of things that are not intuitively obvious," Henson says. "There's a tremendous amount of capital. We're seeing fewer deals than was the case a few years ago, and there's more capital than ever. So paradoxically for good companies, their valuation levels are as good or better than they were in the good old days of 2005, '06, '07. They are phenomenally good for a good, growing business."
On the strategic purchaser side, Henson says, "Companies have a lot of cash, they have strengthened their balance sheets, and they are trying to obtain growth in a very modest growth environment. Companies' profits are significantly increasing, and many of these companies took an 18-month break, a breather, to increase cash balances and pay off debt and deal with internal affairs rather than bringing on new initiatives, and now they have the bandwidth both financially and managerially to bring on growth via acquisition."
Meantime, "the private equity groups have gone out and raised their funds. They're sitting on cash and looking to buy bargains," Minor says.
"Strategic buyers are flush with cash, and one of the ways to grow is deals," Henson says. "As for financial buyers, a lot of this capital was raised back in the good old days, and it wasn't deployed from the middle of '08 into '09, so in addition to new capital raised, if you aggregate all the capital raised and add to that the fact that the debt markets have returned - I have seen numbers anywhere between $500 billion and $1 trillion of transaction value available in the form of financing."
An interesting footnote to demand is that if your business is not a good, growing company, fuggedaboutit.
"If you have a company that is still declining in revenues, has declining EBITDA, and to an extent is unprofitable, there's much less interest in that company," Henson says. "So the old ‘story deal,' where, ‘here's what we're going to do going forward,' those deals are much more difficult to do now."
The same goes for sectors. Some industries continue to struggle, while others are going gangbusters.
Brown specializes in the banking and finance sector, one that continues to struggle.
"Financial services is still in a depressed mode," he says. "The new regulations arising from Dodd-Frank have really hurt the profitability of the business."
Meantime, potential sellers have survived two major economic bubbles in the first decade of the century and have discovered that they're not getting any younger.
"You've got a number of companies that have stayed on the sidelines in this downturn, focused on their business. Some are going to come to market because they need to raise capital, want to partner, or just want to sell the business. So there's a building inventory, if you will, of deals," Henson says.
Seller psychology also says get out, diversify.
Baby boomer entrepreneurs "are coming through the pipeline in record numbers. They have been a business for 20 years and they have missed two gigantic opportunities. They are that much older. They are more cognizant of looking at an exit strategy today than they've ever been before," Minor contends. "If things start to brighten up in various sectors of the economy, those people will be more prone to thinking about putting their companies into the marketplace in 2011 vs. waiting."
It all depends on the larger economy.
"In declining markets, deals tend to fall apart. In rising markets where everybody has low expectations, low budgets, and then the companies start beating their budgets because conditions are improving, not only do you not have the negatives that adversely affect the seller, but the buyer becomes more enthusiastic," Brown says. "So you have a much greater close rate in an improving, strengthening market, which we're now in."
"I don't know exactly when it's going to happen," Henson concedes. "But there is going to be a very, very meaningful uptick in M&A activity, just by the nature of supply and demand."
David Lewis is a freelance writer based in Denver.