State of the M&A Market – Q1 2011

The first quarter of 2011 started off as well as most could have expected after the surge in M&A activity to close out 2010. The Q4 momentum has carried over into the first part of the year as the economy continues to recover, the debt and equity markets improve, and a general advance in buyer confidence gains strength. While several challenges continue to exist, deal makers are emboldened by the recent trend of activity occurring and remain optimistic that the economy and M&A markets will continue to improve during the coming year.

Market Activity

Transaction activity during the first quarter of 2011 increased across all segments when compared to the first quarter of 2010. Acquisitions greater than $250 million lead the way, growing at a striking 83% versus 1Q10. While transactions less than $50 million command all segments in total volume, its growth compared to 1Q10 was a more modest 31%, hardly a disappointment. Transactions $50 to $100 million and $100 to $250 million grew at 73% and 67%, respectively, over 1Q10. Even more impressive, activity surpassed the levels seen during the first quarter of 2007 in all segments except one ( >$250). These transaction trends are buoyed by the rebound in financial markets, a perceived economic stabilization, and the existence of motivated sellers, among other factors.

Transaction Volume and Multiples 1,2

Transaction-Q1-11
Notes: 1 – Data only includes transactions with a published value. 2 – Source: CapitalIQ

Valuation multiples (above) show a slight decrease in 1Q11 compared to 1Q10 in all but one segment; however, multiples across the board have increased over 4Q10 and reinforce the general feeling in the market that valuations are improving. This multiple volatility is a direct result of the difficulty buyers experience in assessing earnings and consumer demand in a slower growth economy. Valuation multiples for 1Q11 decreased in the $50-$100 million, $100-$250 million, and >$250 million range compared to 1Q10 multiples, while multiples in the less than $50 million segment increased slightly from 6.3x 1Q10 to 6.4x in 1Q11, possibly signaling a stabilization of multiples in the lower middle-market.

Strategic vs. Financial Buyers 1,2

Notes: 1 – Data includes transactions with or without a published value. 2 – Source: CapitalIQ
Notes: 1 – Data includes transactions with or without a published value. 2 – Source: CapitalIQ

The availability of cash by strategic buyers remains a key driver in M&A activity during the first quarter of 2011. In the wake of the financial crisis, companies are sitting on record levels of cash, but with interest rates as low as they are, there is a renewed focus to use that cash for acquisitions that grow revenues, expand customer base and increase geographic reach. Deal volume and $’s spent by strategic buyers in 1Q11 increased by 25% and 56% over 1Q10, respectively. Transactions by financial buyers also showed a marked improvement quarter-over-quarter, increasing deal volume by 98% and $’s spent by an extraordinary 169%. With PE investors sitting on an estimated $490 billion of dry powder, financial buyers are primed to be extremely active in 2011 as many funds face investment deadlines in the next few years.

Outlook

As the deal momentum experienced at the end of 2010 spurs new growth in 2011 across all segments, one can’t help but be cautiously optimistic that the M&A markets will continue to improve. While some market conditions, like unemployment, remain negative and economic conditions are making valuations less certain, growth through acquisition remains a primary focus for strategic buyers. Add to that the return of the private equity buyer, with a war chest to match, and the stage is set for a very robust M&A market for the balance of 2011.

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Michael Poole

Investment Banking
mpoole@pcecompanies.com
Orlando Office

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