M&A market remains sluggish

The mergers and acquisitions marketplace lost ground during the first half of 2009.

Through May, there were 2,966 deals announced in the United States, down 27 percent from the 2008 year-to-date level of 4,090 deals, according to the latest report on the industry from Milwaukee-based Robert W. Baird & Co.

May was no exception, according to the Baird report, with 492 announced deals, a 22.4-percent decline from May 2008. Dollar volume during May was $54 billion, a 57.6-percent decline from one year earlier.

A report released by Chicago-based William Blair & Co. had similar results.

“Overall, U.S. M&A activity in May totaled just 542 transactions, down 33 percent from the corresponding period last year and also 33 percent below the trailing 12-month monthly average of 807. This transaction total was the lowest monthly total in over 12 years,” the Blair report stated. “The dollar volume of transactions totaled just $66.8 billion, a 36.7 percent decline from the corresponding period last year and also well below the already depressed trailing 12-month monthly average of $84.6 billion.”

Hostile takeovers

Because many large, publicly traded companies are experiencing short-term liquidity issues, increased pressure to achieve cost savings, and fatigued investors, the M&A market has become increasingly hostile, according to a recent report by The Conference Board, a global organization that specializes in economic and business-related analysis and research.

“Today’s market conditions permit some companies to be ‘put in play’ more easily than before,” said Frederick Alexander, a partner at Morris, Nichols, Arsht & Tunnell LLP in Wilmington, Del., and author of the report for The Conference Board.

Hostile offers made up 47 percent of U.S. mergers and acquisitions in the first two months of 2009, compared with 24 percent for all of 2008 and 7 percent in 2004, the report states.

“In particular, these days we see that larger, traditionally more passive, institutional investors are more willing to tag along activists and pursue more immediate short-term returns to offset their unsatisfactory performance of the last two years,” said Matteo Tonello, director of corporate governance with The Conference Board. “This is another important factor that has been driving the proxy battles of the 2009 season.”

However, the U.S. middle market is showing some signs of life. During May, there were 247 announced middle market deals, a 7.4 percent increase from May 2008. Mirroring the global decline, dollar volume was off 44 percent.

The lower end of the middle market was most improved in the Baird report. There were 212 deals with price tags less than $100 million during May 2009, compared with 168 during May 2008, a 26 percent increase.

The William Blair report supports that claim, showing that deal volume increased 13.6 percent for transactions of $50 million or less. However, deal value within the segment has decreased 15.2 percent.

“Although May was another difficult month for M&A in the U.S., year-over-year comparisons for deal activity were less negative than earlier in 2009,” the Baird report states. “Recent reports of U.S. economic indicators and forecasts have contributed to the perception that the rate of economic contraction may have slowed. The Conference Board’s index of leading indicators, which is designed to predict economic trends six to nine months ahead, rose for the second straight month in May.”

Credit tight

A lack of available bank financing has contributed to a cool M&A market in the Milwaukee area, according to several area investment bankers and M&A brokers.

“The TARP (Troubled Asset Relief Program) money has mostly been used to shore up balance sheets. The lending markets have not improved. Credit standards have not loosened,” said Ronald Miller, managing director with Cleary Gull Inc., a Milwaukee-based investment banking and wealth management firm. “(Banks) are not buying debt. They’re only interested in it unless they lead the deal. Banks are de-leveraging now, they’re not buying credit.”

The difficulty in obtaining bank financing has resulted in buyers – both private equity and strategic – putting more equity into deals. On average both private equity and strategic buyers are now required to put about 50 percent of their own cash into buyouts.

“It’s basically changing the structure of deals,” said Victoria Fox, managing director with Milwaukee-based Emory & Co. “On (one) particular deal we are working on now, our sellers are taking a seller note. It would have been an all cash deal in the past. This is making a larger portion of the price in deferred payments either a seller note or earn-out or the sellers are keeping more stock in the company.”

However, as TARP funds have flowed into banks, lending rules have become increasingly clear, said John Beagle, managing director with the Milwaukee-based investment banking form Grace Matthews Inc.

“The TARP rules are now more clearly understood and enforced,” he said. “For six months, lenders just wanted to have lunch. Now they want to have lunch and actually have some money to lend. It’s getting incrementally better, trending towards a more friendly lending environment. The lending windows are open, just not wide open.” 

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