Winter 2010 – Middle Market Analysis

A 'Flight to Quality' amidst continued declines in overall M&A activity.

On the surface, the statistics are pretty clear: merger and acquisition (M&A) activity has dropped off significantly over the last two years after peaking in the second quarter of 2007. According to Dealogic, global M&A reached $2.3 trillion for 2009, which is 22% lower than 2008 and the lowest annual total since 2004. And according to William Blair & Company, valuations (expressed as EBITDA multiples) have decreased more than 25 percent from 2007 to the most recent twelve months. If there is good news, it is that conditions appear to be improving. Approximately $685 billion in deals were announced in the fourth quarter, which is 15% higher than the same period in 2008 and is the best quarter in the last five according to Dealogic.

The story behind these statistics is all too obvious. The economy has been soft; equity and financing markets have been challenging; and general sentiment has been depressed.

Under the surface, there are several interesting – and somewhat surprising trends – behind these statistics.

• In tough economic times, distressed M&A increases as some acquirers look to take advantage of the downturn. Bankruptcies skyrocketed in 2009, so it shouldn’t come as a surprise that distressed M&A has increased considerably. It is difficult to tell how much distressed M&A has impacted average valuation multiples, but logic suggests that the impact is likely significant – and it masks another important trend.
  
  
• Few companies are performing as well this year as they performed last year. Fewer still are the number of high-performing companies that are available for sale. And while the number of buyers has also decreased somewhat, the demand for high-performing companies is definitely higher than the supply. As a result, strong companies are still being ‘fully priced.’ It is for this reason that some observers have described the current market conditions as a flight to quality. For business owners whose companies are performing well despite the economy, this is potentially good news.
  
  
• Finally, the statistics about the market at large are dominated by public company transactions and the market for smaller companies can be dramatically different. For example, the dollar volume of transactions under $50 million has only decreased 2% YTD relative to last year.

It is always interesting to watch the statistics for clues about the market conditions. For those fortunate business owners whose companies are performing well, the market conditions may not be as bad as they think. But far more significant in determining the ultimate value of a company is the degree to which the owner plans for an eventual transition. So if you are waiting for the economy to recover before you exit your company, use the time well. ASG can show you how, beginning with our article on Increasing the Value of a Privately Held Company.

For more information on current market conditions, call 425-450-4800 or email info@asgpartners.com.


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