M&A Data - Making Sense of Conflicting Reports

In 2009, the financial newswires are sending us mixed messages.

1) PricewaterhouseCoopers just released a report showing huge declines for global deals in the Industrial Manufacturing sector.

2) The same week, GF Data Resources reported that middle market deal volume for transactions valued between $10 million and $250 million remained strong in 2008.

So, on one hand we have terrible numbers for 2008 acquisition activity and the next report tells us everything is fine.

We highlight the data from both reports and then explain what it means for middle market companies in the US.

PWC Reports Negative M&A Activity

Last week, PricewaterhouseCoopers LLP ("PWC") came out with their report of 2008 M&A Data in the Industrial Manufacturing Sector, analyzing mergers and acquisitions with a disclosed value over $50 million.

The number of Mergers and Acquisitions in the industrial manufacturing sector dropped 32% in 2008 compared to 2007, with total dollar amount of deals declining 57%.

The research appeared in PWC's report: "Assembling Value: Fourth-quarter 2008 Mergers and Acquisitions Analysis" released last week.

In 2008, there were 141 deals above $50 million, compared to 206 deals in 2007 and 169 deals in 2006.

Total dollar amount of deals reached $39 billion in 2008, less than half of the $88 billion in 2007.

The average dollar amount of deals dropped to $275 million per deal in 2008, compared to $424 million in 2007 and $545 million in 2006.

Fourth Quarter 2008 shows steepest declines
Q4 2008 showed a particularly steep decline with only 11 deals, compared to 71 deals in Q4 2007 and the dollar amounts in Q4 2008 were only $3 billion, compared to $40 billion in Q4 2007.

$1 billion+ deals
In 2008 there were only 5 deals with a disclosed value over $1 billion, compared to 17 in 2007 and 23 in 2006.

Financial buyers
Financial buyers, who are typically very active in the manufacturing sector, only acquired 37 companies in 2008, compared to 72 in 2007 and 58 in 2006.

Strategic buyers
Strategic buyers acquired 104 companies in 2008, compared to 134 deals in 2007 and 111 deals in 2006.

PWC's data does not include most of the middle market deals under $50 million and many of the deals under $100 million where deal terms and sale prices remained confidential, but it is a good indicator of recent trends across the middle market.

Source: PricewaterhouseCoopers LLP


GF Data Resources reports High Valuations and Strong Deal Volume

GF Data Resources released its Middle Market M&A Valuation Report for the fourth quarter of 2008 the same week. GF Data Resources is a proprietary database that collects data on Private Equity transactions valued between $10 million and $250 million.

According to GF, Middle Market deal volume and valuations held steady across all industries from Q3 2008 to Q4 2008.

Deal Volume
114 Private Equity firms contributed to the report and they completed 25 deals in the fourth quarter of 2008. 27 deals were completed in Q3 2008, compared to 50 deals the first half of 2008. This confirms steady acquisition volume through all four quarters of 2008.

A driver for this deal volume is the substantial availability of cash at Private Equity firms. Many of the Private Equity firms ClearRidge has worked with in the last few months have confirmed that they are sitting on up to 90% of the capital they raised in 2007 and 2008 and they are being encouraged by their limited partners (investors) to keep the money, go ahead and source new acquisitions.

This untouched cash is often referred to as "dry powder" and the substantial stock piles of cash will prove to be a significant driver to Acquisition volumes by Private Equity firms in 2009.

Valuations
"Fourth quarter valuations remained in line with quarterly averages dating back to mid-2007, when the mortgage lending crisis first affected public equity markets," according to Andrew Greenberg, CEO of GFDR.

The primary valuation metric - Total Enterprise Value as a multiple of adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (TEV/EBITDA) was 5.9x for Q4 2008, down from 6.3x in Q3 2008.

Debt Levels
The biggest change in 2008 was a decrease in debt levels for the acquisitions. "Debt levels fell sharply, a result of the tightening credit markets and the lack of available cash needed to finance these deals," according to Mr. Greenberg.

"Total debt and senior debt declined dramatically, falling to 2.4x Adjusted EBITDA and 1.9x, respectively," said Greenberg. "Those number were 3.4x and 2.6x, respectively, in the third quarter, and averaged 3.4x and 2.5x respectively for the first half of 2008. As a result of declining debt levels, average equity contributions soared to 59.9 percent, up almost 20 percentage points from the third quarter of 2007."

Debt Pricing
Debt spreads widened, as the 90-day LIBOR interest rate (a benchmark for commercial lending) dropped from 4.1 percent on September 30 to 1.4 percent at year end. Average initial pricing on senior debt declined only slightly (from 7.4 percent to 7.2 percent), causing the average spread on senior debt to jump from 4.3 percent to 5.8 percent. Spreads on subordinated debt also increased.

Individuals and companies interested in subscribing to the Middle Market M&A Valuation Report can contact GF Data Resources by visiting their website, www.gfdataresources.com. Source: PEP Digest.

The Truth Behind The Numbers

Acquisitions are still happening. Deals are getting done.

For an acquisition to get to the finish line, it needs to make sense for the acquirer and make sense for the company being acquired. Nothing has changed there.

The Sale Price of Your Company
It is true that companies are still selling for high valuation multiples. However, acquirers are forward-looking in their valuation, so last year, they would have used your 2007 full-year EBITDA number and then paid a multiple on their projection for full-year 2008 EBITDA.

Moving to the present, if your EBITDA was $7 million for 2008 and a company like yours should sell for 5x, then if you anticipate 2009 EBITDA remaining at 2008 levels then you could still anticipate that your company should sell for $35 million. Good news.

However, many companies are likely to face a tough 2009. Let's say you expect your 2009 revenues to decline and as a result you project your 2009 EBITDA to come in around $4.5 million. Well, it is still reasonable to expect a 5x multiple or more, but now that 5x may is worth around $22.5 million on projected numbers.

So, how do you get back the additional $12.5 million your company could have sold for last year? You need to be more creative and more flexible.

Instead of requiring full cash payment at closing, you should consider a combination of seller financing, stock and warrants, in order to get closer to last year's expected sale price of $35 million.

Even if the buyer tried to negotiate a reduced multiple to maybe 4.5x, that could be acceptable if they are willing to add further consideration (cash, stock, warrants) for special consideration and intangibles, which could include high market share, significant customer relationships, brand name recognition, or any other intangible that sets your company apart from the rest.

Getting your deal done is an art not a science. Every company is different, every situation is different and every deal needs to be different.

Deals are getting done. Debt financing is still available for buyers. You just need to work smarter and harder in the current environment to get your deal done.

All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.

ClearRidge provides Merger & Acquisition, Restructuring and Corporate Finance services advice for midsize companies.

M&A includes buyer and seller representation for companies with $20 million to $500 million in revenues.

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