Financiers across North America remain optimistic that the mergers and acquisitions (M&A) market will continue to recover from the substantial declines it suffered during the global financial crisis.
Dave Dandel, senior vice-president of Seattle-based Evergreen Pacific Partners, noted at this year’s ACG Vancouver Capital Connections conference that the number and volume of leveraged buyout deals in the U.S. in 2011’s first quarter has returned to levels similar to those in early 2005.
“As we see some of the big mega-firms take advantage of the high-yield market,” said Dandel, “we’ll see more of the mega-deals drive these numbers higher.”
The price for companies in middle-market deals (worth between $10 million and $500 million) has risen to 7.7 times earnings before interest, taxes, depreciation and amortization (EBITDA). That’s up from five times EBITDA in 2009’s first quarter. Increased private-equity firm activity and strategic acquisitions from companies looking to expand have fuelled M&A growth.
Last year, the proportion of global M&A deals involving private equity firms rose to 16%, up from the low of 10.5% in 2009. But that’s still well below 2006’s peak of 25%. Dandel said private equity activity is likely to grow over the next couple years as fund managers consider selling their portfolio companies to cash in on their investments as market fundamentals improve.
Credit availability also continues to increase in North America.
According to Douglas Brosius, managing director of Pittsburgh-based PNC Mezzanine Capital, the major banks and other senior lenders in the U.S. are returning “pretty aggressively” into the M&A market, which is increasing the amount of credit available for a deal. In the past two years, the cash required by buyers to acquire a company has dropped from a high of 45% of the purchase price to around 30%.
But while deal financing continues to improve, closing a deal remains morechallenging than at the peak of the M&A boom in 2007-08.
Bill Rogers, CEO of Toronto-based CCC Investment Banking, said that surprises about a target company during the due diligence process can derail a deal. “The biggest mistake is not doing enough due diligence. Assuming what management tells you is true will come back to haunt you.”
Rogers also noted that market uncertainty and potential changes in a company’s regulatory environment continue to affect completion of M&A deals.
But an owner’s appreciation of the business sales process and the significant changes that accompany the sale of a company remain among the most common challenges.
Said CAI Capital partner Tracey McVicar: “A lot of things seem strange and tough for a vendor, but are still very common. The best advisers are very close to their clients and good at knowing when they’re getting skittish and knowing how to calm them down. Expectation management is what it’s about.”