Distressed sales to drive M&A in 2010

Dec 22, 2009

Healthcare eyed as most active sector, says survey

In a near unanimous consensus, 94 percent of middle-market M&A professionals expect strategic investments to accelerate in the first half of 2010 and lead to a pickup in deal activity, according to the latest semi-annual survey of deal makers released by the Association for Corporate Growth (ACG) and Thomson Reuters.
 
Only 8 percent of respondents say the current market favors private equity investors while 74 percent say it favors strategic investors. More than half of private equity respondents (54 percent) are actively pursuing distressed companies and 48 percent of all respondents expect more than one in four M&A deals to be distressed in the first half of 2010.

Worldwide M&A activity totaled $1.8 tn in announced deals through November, a drop of 33 percent from the comparable period in 2008, according to Thomson Reuters. Of this total, $461.9 bn was accounted for by mid-market deals (defined by Thomson Reuters as transactions under $500 mn), a drop of 31 percent from the 2008 level. Strategic M&A activity accounted for 94 percent of total announced deals in 2009, the highest percentage since 2001, but still showed a 32 percent decline from the comparable period in 2008.

The healthcare/life sciences sector is named by 23 percent of respondents as the most active area for merger activity in the first half of 2010, followed by manufacturing and distribution (18 percent), financial services (14 percent) and technology (11 percent).

The deal making professionals also expect the healthcare/life sciences sector to show the most organic growth (28 percent), followed by government-related businesses (16 percent), energy (13 percent) and technology (12 percent). Thirty four percent of dealmakers identify manufacturing and distribution as presenting the best opportunities for distressed investing followed by real estate (16 percent), consumer products and services (15 percent) and financial services (13 percent).

The year-end survey reveals a persistent negative sentiment with 87 percent describing the current M&A environment as fair or poor, compared with 88 percent at mid-year 2009 and 86 percent a year ago. But it also reveals a more positive forward outlook with 82 percent of deal makers expecting an increase in merger activity over the next six months, up from 56 percent in June.

Eighty percent of survey respondents identify the current environment as a buyer’s market. Although average middle-market EBITDA levels have fallen to 8.4 today from a high of 10.1 in 2007, according to Thomson Reuters, deal makers are still looking for bargains. In fact, 80 percent expect to pay no more than five times EBIDTA for companies over the next six months.

The credit crunch continues to decrease in importance as the biggest obstacle to M&A activity (29 percent vs 33 percent mid-year, and 43 percent this time last year), and is replaced by the bid/ask gap (the gap between the prices at which companies are willing to sell and the prices buyers are willing to pay) with 37 percent identifying it as the main obstacle compared with 27 percent mid-year, and 22 percent this time last year.

In a press release accompanying the report, Harris Smith, former chair of ACG and current managing partner of private equity and strategic relationships at Grant Thornton, says: ‘Business owners are slowly realizing that valuations will not return to what they were several years ago. Private equity and strategic buyers are all-too aware of this and are patiently waiting for sellers to come to grips with the new valuation paradigm and to take some money off the table.’

Further details are available here.

The ACG-Thomson Reuters Year-End 2009 DealMakers Survey polled 921 investment bankers, private equity professionals, corporate development officers, lawyers, accountants and business consultants in October and November 2009.

By Brad Allen