State of the M&A Market – Q3 2010

Merger and acquisitions transaction activity dropped slightly in the third quarter of 2010 after a strong second quarter performance, almost solely to the decrease in under $50 million transactions. The decrease in activity is somewhat surprising given reports that financial and strategic buyers across multiple sectors are reporting an uptick in deal flow. Business owners seeking liquidity prior to the upcoming change in tax laws is one reason given for the increased deal flow activity. Hopefully the drop is a minor blip that will be offset by significant activity in the 4Q10. Even though activity was off slightly in 3Q10, total transaction volume in 2010 has surpassed the levels achieved during all of 2009. Through the first three quarters of the 2010 total transactions equaled 8,480 versus 8,325 for all four quarters of 2009. This achievement is certainly encouraging considering the challenges 2009 presented, but additional progress will need to be made before a healthy M&A market is achieved.

Market Activity

Transaction activity was mixed with two segments increasing and two decreasing in 3Q10. For transactions between $50 million and $100 million and $100 million and $250 million, activity increased by 7% and 27%, respectively. While at the valuation extremes, below $50 million and above $250 million transactions have decreased by 19% and 7%, respectively. These transaction trends indicate a focus on the mid–size companies as acquirers are seeking meaningful platforms that will help broaden the current focus of their business, enhance penetration of existing markets, offer new avenues for growth and high returns.

Transaction Volume and Multiples 1,2

transaction
Notes: 1 – Data only includes transactions with a published value. 2 – Source: CapitalIQ

 

Valuation multiples improved during 3Q10 in all segments except for transactions between $100 million and $250 million. In all the segments, valuations remain strong providing evidence that buyers are willing to pay a premium for good companies. The valuations do seem high, but this information does offer some insight into the multiples that are being paid for companies today.

Strategic vs. Financial Buyers 1,2

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

 

In 3Q10, strategic and financial investors moved in slightly different directions. Financial acquirers increased the dollar value of their investments by 18% to $33 billion while total transactions decreased 1% to 296. As a result, the average transaction size increased from $93.3 million in 2Q10 to $111.5 million; an increase of 20%. Meanwhile, strategic acquirers decreased the dollar value and volume of transactions in 3Q10 by 4% and 7%, respectively. The larger drop in the total number of transactions versus dollars invested led to an increase in transaction size as well. In 3Q10, total transaction size increased 3% from $69.2 million to $71.3 million. A number of factors could be influencing this, including: active financing markets, higher quality companies on the market, strong cash positions on balance sheets, and attractive valuations.

Outlook

Hopefully, the slight drop in transactions is only a minor blip and expectations for strong M&A activity in 2010 will be fulfilled in 4Q10. This year has already proven to be an improvement over 2009. Buyers are actively seeking acquisitions, but still remain selective with the companies they will acquire. Acquirers are either willing to pay up for quality or aggressively pursue average/underperforming companies that can be purchased at lower valuations. Expectations continue to remain healthy with the hope that activity will continue to improve in 2011.

If you have comments or questions about this article, or would like more information on this subject matter, please contact us.
Michael Rosendahl

Investment Banking
mrosendahl@pcecompanies.com
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