Florida Dealmakers Expect Strategic Investing Uptick in 2010

Merger professionals from Florida say the current M&A environment remains moribund, yet express guarded optimism about a pickup in the first half of 2010, with strategic investors leading the way.

The latest twice-yearly survey by the Association for Corporate Growth and Thomson Reuters reveals that negative sentiment about the dealmaking environment has not changed during the last year, with 95 percent of dealmakers from Florida saying the current M&A environment is fair or poor.

Over the next six months, however, 71 percent of dealmakers from Florida expect an increase in merger activity.

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

Ninety-two percent of survey respondents identified the current environment as a buyer’s market, and 79 percent of respondents said the current market favors strategic investors.  A robust 89 percent of respondents expect strategic investments to accelerate in 2010 and 57 percent of respondents are actively pursuing distressed and undervalued companies.

Dealmakers expect the following percentage of M&A deals to be distressed in the first half of 2010:
• 0-10 percent  (11 percent)
• 11-25 percent (35 percent)
• 26-50 percent (38 percent)
• More than 50 percent (16 percent)

"In one year Florida dealmaker sentiment has transitioned from ‘the worst is yet to come’ to ‘the worst may now be behind us,’" says Bryan Spaulding, principal of Spaulding Group Inc. and chairman of ACG Tampa Bay. “Most M&A practitioners believe the best longer term entry investments come during uncertain times and evidence suggests lenders are stepping up and taking advantage of good loan opportunities more so today than six months ago."


Survey results indicate that although the credit crunch has decreased in importance as the biggest obstacle to M&A activity (44 percent), the gap between the prices at which companies are willing to sell and the prices that buyers are willing to pay has been rising in importance (33 percent).

Although average middle-market EBITDA levels have fallen to 8.4 today from a high of 10.1 in 2007, dealmakers are still looking for bargains.  In fact, 89 percent expect to pay no more than 5x EBITDA for companies over the next six months.

Florida dealmakers expect the following sectors to experience the most merger activity in the first half of 2010:
• Healthcare/life sciences (22 percent)
• Financial services (19 percent)
• Business services (19 percent)

They expect the following sectors to experience the most organic growth:
• Healthcare/life sciences (35 percent)
• Government-related (19 percent)
• Energy (11 percent)
• Financial services (11percent)

According to Thomson Reuters, the volume of all worldwide mergers and acquisitions totaled $1.8 trillion in announced deals through Nov. 30, 2009, a decrease of 33 percent from the comparable period in 2008.  Of this total, M&A deals in the mid-market, defined by Thomson Reuters as transactions of less than $500 million, fell 31 percent from the 2008 level to $461.9 billion.

Through Nov. 30, 2009, strategic M&A activity totaled $1.7 trillion, a 32 percent decline from the comparable period in 2008.  Overall, strategic merger activity accounts for 94 percent of total announced M&A this year, the highest percentage since 2001.

Dealmakers see improved debt markets, but plan on increased equity
Dealmakers are optimistic that the debt markets will continue to rebound, with 68 percent saying they will improve over the next six months, 24 percent saying they will remain the same and 9 percent saying they will worsen.

Respondents say the maximum leverage level in today’s environment is:
• 1-2x (19 percent)
• 2-2.5x (48 percent)
• 2.5-3x (23 percent)
• 3-3.5x (10 percent)
• More than 3.5x (0 percent)

Most deal professionals (72 percent) expect leverage levels to decrease in the next six months.

Despite an expected improvement in access to credit, 50 percent of dealmakers expect to put more equity into deals over the next six months, with almost half (44 percent) saying they expect to invest 41 percent or more equity in companies in the next six months.

Private Equity Eyes Opportunities
Dealmakers say the best strategy for success in the current environment is:
• Focus on our portfolio companies (16 percent)
• Buy portfolio company debt (13 percent)
• Focus more on deal sourcing/marketing (13 percent)
• Sit it out and wait for a better investment climate (13 percent)

Industries that present the best opportunities for buyouts are:
• Manufacturing and distribution (29 percent)
• Healthcare/life sciences (21 percent)
• Financial services (12 percent)
• Business services (9 percent)
• Technology (9 percent)

Industries that present the best opportunities for distressed investing are:
• Real estate (37 percent)
• Financial services (23 percent)
• Manufacturing and distribution (17 percent)

Respondents say they have written down their portfolio company values in the last 12 months by:
• 15 percent or less (32 percent)
• 16-25 percent (21 percent)
• More than 25 percent (11 percent)
• Held steady (37 percent)
• Marked up (0 percent)

More than half (60 percent) of private equity professionals say they expect to maintain portfolio company values at year-end 2008 levels; while the remainder forecast write-ups over 2008 year-end levels of:
• 15 percent or less (25 percent)
• 16-25 percent (5 percent)
• More than 25 percent (10 percent)

More than one-third (37 percent) of respondents say that 51 percent or more of their portfolio companies are performing below their prior year in EBITDA.

In 2010, they believe private equity will change in the following ways:
• Significant consolidation, winnowing out (52 percent)
• No change (24 percent)
• Increased need for PE firms to differentiate themselves (19 percent)

Some 55 percent of respondents are concerned about the public’s perception of private equity.

“The value of middle market private equity comes through loud and clear in this survey,” says Gary A. LaBranche, CAE, ACG President & CEO.  “Even as the growth community works to recover from the Great Recession, dealmakers are confident in the future of free enterprise and the job growth and opportunity that it provides to society.  That speaks volumes about why middle market private equity is so vital to our economy.”