State of the M&A Market – Q2 2013
Cultivated by the globalization of business and the desire of foreign buyers to access sophisticated markets, the world appeared to have become a much smaller place through mid-year 2008. Buoyed by a soft U.S. dollar, the desire of foreign companies to acquire well-known brands and driven by the need to access advanced technologies, the U.S. became an attractive marketplace for takeover targets. As a result, investments in U.S. targets by non-domestic participants grew as a percent of total M&A transaction volume.
Subsequent to 2Q08, the “Great Recession” set in and the U.S. struggled from economic pressures domestically as well as abroad. The market encountered a number of challenges which hindered its ability to recover and triggered a fog of global economic uncertainty. As a result, activity by foreign buyers tumbled, returning to pre-bubble levels. Each of the rolling 12-month periods following 2Q08 experienced declines in foreign activity, settling at 8.5% of U.S. transaction volume for the period ending 2Q13.
There is a myth of many business owners that foreign buyers pay more than U.S. companies in acquisitions. The available data would not support that assumption over the past ten years. Canada and the United Kingdom are the two most prolific buyers of U.S. companies. In the crest of foreign activity, Canada paid an average of 9.5x and the U.K. paid nearly 12.0x EBITDA, while U.S. acquirers paid 11.0x. More recently and in line with sinking foreign activity levels, values paid by the two largest foreign buyer groups fell, descending below the 10.0x paid by U.S. buyers.
The future of foreign buyers remains uncertain, as they will likely seek stability at home before embarking on cross-border transactions. Additionally, concern remains prevalent surrounding the Federal Reserve’s intention to scale back bond purchases later this year, kindling fears of higher U.S. interest rates. An increase in interest rates will discourage foreign entrants and will likely slow M&A activity. Faith that the interest rate landscape has stabilized will be a necessary stimulant for foreign participation in U.S. transactions going forward.
Source: S&P Capital IQ and PCE Investment Bankers
Market Activity – Slowdown in Strategic Buying
2013 M&A activity continues to underwhelm, following another quarter of sub-2012 results. Transaction volume fell for the second consecutive quarter as the financial arena remained ubiquitous. A lean pipeline at fiscal year end 2012 left the market starved for deals, which is now fully evident.
On a rolling 12-month basis through 2Q13, total transaction volume was approximately 9,500 deals, compared to the year prior which was more than 9,700. While rolling 12-month volume was slightly down, the 2Q13 quarterly decline was more dramatic as volume slid by more than 22% over 2Q12. Driving the deterioration were strategic transactions, which reported nearly 500 fewer transactions during 2Q13 when compared to 2Q12. Similar to transaction volume, total value also fell. Strategic activity again drove the slump with a 34% drop in quarterly value.
Despite a slow first half of 2013, conversations in the marketplace illustrate improving pipelines. Given the lead-time required to close M&A transactions, one would deduce that deal flow is primed to advance during 3Q13 and 4Q13. Considerable PE dry powder, excess cash on corporate balance sheets, and a favorable lending environment are anticipated to bring buyers to the market, driving growth.