State of the M&A Market – Q3 2011

Following a dynamic first half of 2011, M&A activity saw a slight decline in the third quarter. Volatility in the equity markets, global economic uncertainty, and seasonal slowing negatively impacted transaction volume. As skepticism in the market place continues to linger, buyers have been cautious in putting cash to work. Despite the challenges facing the market’s participants, deal makers remain committed as year-over-year performance gains traction.

Market Activity

Transaction activity during the third quarter of 2011 increased across three of four segments when compared to the third quarter of 2010. Deal volume in the less than $50 million segment led growth with a 38% improvement, while the $50 million to $100 million and the $100 million to $250 million segments grew by 13% and 27%, respectively, when compared to 3Q10. The volume of transactions in the over $250 million segment represented only minor deterioration with an 8% decline. In line with the first half of 2011, overall M&A activity in 3Q11 has displayed impressive performance over prior years, outpacing pre-recessionary levels of 3Q07.

Transaction Volume and Multiples

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

Largely driven by progress in transaction activity, valuation multiples (above) have shown an uptick in 3Q11 when compared to 3Q10 in two of the four segments. Median valuation multiples in the less than $50 million and $50 to $100 million segments increased over 3Q10, while median multiples in the $100 million to $250 million and greater than $250 million segment decreased by 11% and 8%, respectively, versus 3Q10. While multiples for half of the segments fell on a year-over-year basis, it should be noted that 3Q11 multiples exceeded 2Q11 multiples in all segments. This trend may be interpreted as a preliminary indicator of enhanced confidence in the market.

Strategic vs. Financial Buyers

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

Deal volume in the private equity sector has remained well above average for the first three quarters of 2011, when compared to prior years. Year-over-year, total private equity activity in 3Q11 is 69% higher than 3Q10. Strategic buyers have also experienced significant expansion in 3Q11 volume as denoted by 26% growth over 3Q10. Despite the healthy level of deal movement, total dollars spent by private equity groups has faded by 5%, indicating lower multiples through 3Q11. On the contrary, strategic buyers saw a resurgence of more than 38% in dollars spent, which in turn manifested into higher multiples. Median strategic multiples increased from 9.62x in 3Q10 to 10.92x in 3Q11.

While market volatility and economic headwinds remain key factors in the M&A decision, a sustained recovery in corporate profits, combined with attractive interest rates and record levels of cash on corporate balance sheets, will help to perpetuate the M&A market.
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Michael Poole

Investment Banking
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