M&A Buy-Side Update Fall 2009
Gary Moon shares an interesting perspective on the state of the M&A market:
As we settle into fall of 2009, it’s an important time for companies who have the strength and capacity to look at acquisitions to take a moment and review what will be a significant trend on the buy-side in the next 12 months: the end of rampant opportunistic activity.
So far in 2009, we’ve seen the volume of M&A drop fairly precipitously both in terms of dollar volume, and transaction volume. The TMT (Technology, Media and Telecom) focused indexes that we track are down something on the order of 40% from 2007 highs on a transaction volume basis, and more from a total valuation perspective. Although activity overall has decreased what has remained has been principally made up of two kinds of acquisition activity: the very large and the very small, at significantly reduced valuations.
Over the last 11 months has been a pretty dramatic reordering of the competitive landscape within many industries. Those that took on too much leverage, too much risk, or were simply below the cut line in a world where capital is not quite so easy to get have been challenged to survive – to say the least. Healthy acquirers, on the other hand, have been looking at solid opportunities along this interesting duality at the opposite ends of the deal spectrum.
With valuation levels at decade lows, many companies have been able to strengthen and enhance their competitive situations through acquiring large competitors, or divisions of their competitors, who were in a weaker position. If I can buy a business/company that makes up a non-trivial percentage of my overall business at 1x revenue (or 4x ebita, or pick your favorite valuation metric) then I know when the market comes back I’ll be valued at 2x revenue (or 7x ebita, etc.) and can significantly move the needle for my business – not only from a size and competitive position standpoint, but from a time/valuation arbitrage as well.
The second type of acquisition opportunity that has been active is the “no choice” sale. As debt levels exceed capacity for payment, as capital markets get shut down, whether short term, venture capital or private equity in nature, a whole class of companies came due for their next tranche in the capital markets only to find them closed. Buyers, as they should, have had absolutely no mercy with these companies. With no leverage and very few options, they become the domain of bankruptcy sales and asset sales, frequently for pennies on the dollar, or the invested dollar.
As in all things, trends come to a close. The market comeback since March of this year has driven the valuations of the very large back up to a respectable percentage of their previous levels. When the valuation arbitrage equation is not so dramatic, these types of initiatives ultimately occur on a less frequent basis as risks go up. On the opportunistic side of things, the oversupply of companies who can no longer access the capital markets is falling. Many of those companies have shut down, been sold, righted their ships so to say, or are in a process right now. Very few companies were structured to go more than 18 months without access to additional capital. Right now we are at month 11.
As we have discussed previously, acquisitions make the most sense from a value creation standpoint first, when a program is created and executed consistently through all markets (good, indifferent, poor); and second, when the economy is in recession or just coming out of one. With valuations of larger companies approaching their long term averages and the supply of opportunistic acquisition targets settling into their traditional patterns within the next 12 months, there is no time like the present to fully evaluate if acquisition activity is the right step for your firm, and if so, step into the market.
Gary Moon is a Managing Director at RidgeCrest Capital, a technology investment banking firm based in San Francisco. Gary recently relocated to Barcelona, Spain to open RidgeCrest's newest Eurpoean office.
