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Posted: December 11, 2009

Dealmakers survey: M&A upswing in 2010?

Strategic investing will lead the way

ACG Denver

Merger professionals from Colorado say the current M&A environment remains moribund, yet express guarded optimism about a pickup in the first half of 2010, with strategic investors and distressed sales leading the way.

The latest twice-yearly survey by the Association for Corporate Growth (ACG) and Thomson Reuters reveals that negative sentiment about the dealmaking environment has not changed during the last year, with 96 percent of dealmakers from Colorado saying the current M&A environment is fair or poor.

Over the next six months, however, 83 percent of dealmakers from Colorado expect an increase in merger activity. "ACG has always been the place to connect to the people and ideas that grow business and we look forward to continuing to support the Colorado dealmaking community as the market improves," says Kathleen Quinn Votaw, ACG-Denver's President.

The ACG-Thomson Reuters Year-End 2009 DealMakers Survey polled investment bankers, private equity professionals, corporate development officers, lawyers, accountants and business consultants in October and November 2009.

More than 80 percent of survey respondents indentified the current environment as a buyer's market; 73 percent said the current market favors strategic investors; and 90 percent expect strategic investments to accelerate in 2010. About one-third of respondents are actively pursuing distressed and undervalued companies.More than 80 percent expect strategic investments to accelerate in 2010. 35 percent of respondents are actively pursuing distressed and undervalued companies.

"As the survey indicates, 2009 has been a difficult year in the M&A market," said Warren R. Henson, Jr., President of Green Manning & Bunch, Ltd. and previous ACG Board member. "There remains a valuation gap between buyers and sellers and debt financing has been scarce, creating difficulties to closing transactions. Strategic buyers with cash on their balance sheets have had the edge but, with a $400 billion capital overhang, private equity groups are hungry and anxious to get back into the market. They have been showing interest in quality tuck-in and new platform acquisitions. Since June 2009 we have seen a significant uptick in activity and engaged transactions, and we expect that 2010 will show considerable improvement over 2009."

While the credit crunch has decreased in importance as the biggest obstacle to M&A activity (29 percent), the gap between the prices at which companies are willing to sell and the prices that buyers are willing to pay has been rising in importance (44 percent).

Although average middle-market EBITDA levels have fallen to 8.4 today from a high of 10.1 in 2007, dealmakers are still looking for bargains. In fact, 78 percent expect to pay no more than 5x EBIDTA for companies over the next six months.

Colorado dealmakers expect the following sectors to experience the most merger activity in the first half of 2010:
• Healthcare/life sciences (30 percent)
• Financial services (28 percent)
• Technology (18 percent)
• Manufacturing and distribution (8 percent)

They expect the following sectors to experience the most organic growth:
• Healthcare/life sciences (22 percent)
• Business Services (22 percent)
• Energy (15 percent)
• Government-related (12 percent)

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According to Thomson Reuters, the volume of all worldwide mergers and acquisitions totaled $1.8 trillion in announced deals through November 30, 2009, a decrease of 33 percent over the comparable period in 2008. Of this total, M&A deals in the mid-market, defined by Thomson Reuters as transactions under $500 million, fell 31 percent from the 2008 level, totaling $461.9 billion.

Through November 30, 2009, strategic M&A activity totaled $1.7 trillion, a 32 percent decline from the comparable period in 2008. Overall, strategic merger activity accounts for 94 percent of total announced M&A this year, the highest percentage since 2001.

Dealmakers are optimistic that the debt markets will continue to rebound, with 70 percent saying they will improve over the next six months, 23 percent saying they will remain the same and 8 percent saying they will worsen.

Respondents say the maximum leverage level in today's environment is:
• 1-2x (36 percent)
• 2-2.5x (46 percent)
• 2.5-3x (18 percent)
• 3-3.5x (0 percent)
• More than 3.5x (0 percent)

Most deal professionals (53 percent) do not expect leverage levels to increase in the next six months.

Despite an expected improvement in access to credit, 64 percent of dealmakers expect to put more equity into deals over the next six months, with more than half (52 percent) saying they expect to invest 40 percent or more equity in companies in the next six months.

Dealmakers say the best strategy for success in the current environment is:
• Stick to original strategy (20 percent)
• International opportunities (17 percent)
• Focus more on deal sourcing/marketing (10 percent)
• Focus more on add-on acquisitions (10 percent)

Industries that present the best opportunities for buyouts are:
• Healthcare/life sciences (26 percent)
• Business Services (20 percent)
• Financial Services (17 percent)
• Manufacturing and distribution (14 percent)

Industries that present the best opportunities for distressed investing are:
• Real Estate (33 percent)
• Manufacturing and distribution (22 percent)
• Financial Services (19 percent)
• Consumer products and services (11 percent)

Respondents say they have written down their portfolio company values in the last 12 months by:
• 15 percent or less (19 percent)
• 16-25 percent (29 percent)
• More than 25 percent (24 percent)
• Held steady (29 percent)
• Marked up (0 percent)

The majority (61 percent) of private equity professionals say they expect to maintain portfolio company values at year-end 2008 levels; while the remainder forecast write-ups over 2008 year-end levels of:
• 15 percent or less (17 percent)
• 16-25 percent (22 percent)
• More than 25 percent (0 percent)

Forty-five percent of respondents say that 50 percent or more of their portfolio companies are performing below their prior year in EBITDA.

In 2010, private equity will change in the following ways:
• Significant consolidation, winnowing out (38 percent)
• Increased need for PE firm differentiation (33 percent)
• No change (25 percent)
• Rapid growth, innovation (4 percent)
• Other (0 percent)

Some 36 percent of respondents are concerned about the public's perception of private equity.

"The value of middle market private equity comes through loud and clear in this survey," said Gary A. LaBranche, CAE, ACG President & CEO. "Even as the growth community works to recover from the Great Recession, dealmakers are confident in the future of free enterprise and the job growth and opportunity that it provides to society. That speaks volumes about why middle market private equity is so vital to our economy."

Survey Methodology
The twice-yearly survey, conducted in October and November 2009, was completed by 921 ACG members and Thomson Reuters customers, including 42 from Colorado. Respondents from Colorado were comprised of private equity, venture capital and buyout firm members (14 percent); investment bankers, intermediaries, brokers (31 percent); lenders, finance providers (2 percent); and service providers, such as lawyers, workout specialists, accountants and consultants (38 percent). For a copy of the full global survey results, please go to:

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The Association for Corporate Growth (ACG) helps companies grow by providing a forum for best strategies and practices in organic growth and mergers and acquisitions. One of 53 ACG Global chapters with a total of 12,000 members, ACG-Denver includes representatives from companies, private equity, finance, and professional service firms. ACG-Denver helps Colorado business owners and senior executives navigate the growth business community through valuable content; best-of-class resources; capital formation; and networking and connections with an influential community of executives growing companies locally, statewide and worldwide. Leaders focused on building value in their organizations belong to ACG.

Enjoy this article? Sign up to get ColoradoBiz Exclusives. The opinions expressed in this article are solely that of the author and do not represent ColoradoBiz magazine. Comments on articles will be removed if they include personal attacks.

Readers Respond

EU and russian m&a market in 2010 instead of poor enconomic show the increasing value of deals. "current M&A environment is fair or poor" - controversial view By art on 2010 05 06

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