State of the M&A Markets – Q1 2009

As expected, there was a significant decrease in mergers and acquisitions activity and valuations in 1Q09. During the first quarter the markets were still sifting through all the events that took place in the final four months of 2008 and the resulting uncertainty. In addition, expectations were high as the Obama Administration took the reins of power. Although progress was made on many fronts in the first quarter, many acquirers determined that it was best to sit on the sidelines due to tight credit markets and the high levels of economic and market uncertainty.

Even though transaction levels are low and are projected to stay below the levels achieved during the previous boom, activity is widely expected to improve during the remaining portion of the year. This is largely a result of some thawing of the credit markets, along with substantial capital that is waiting to be deployed at strategic and financial acquirers, and the lower valuations of companies. Another factor that reduced transaction levels in 1Q09 was the number of companies that determined not to move forward with a sale process in 4Q08. Many companies are now entering the market that postponed a sale during turbulent times.

Market Activity

Deal activity dropped substantially during 1Q09. When compared to transaction level in 4Q08 and 1Q08, the contrast is striking. Compared to 4Q08, transaction levels decreased at all valuation segments except deals with values above $250 million. The most dramatic decrease was in the $50 to $100 million valuation range, which dropped 52.1%. When 1Q09 is compared to 1Q08, deal activity is down at all levels with the most significant decrease taking place in the $50 to $100 valuation segment. During this period, the number of transactions dropped by 70.4%.


Transaction Volume and Multiples

Source: CapitalIQ / PCE

Valuation levels also decreased in 1Q09. The available data indicates significant drops in valuations at all levels and the decrease seems extreme at nearly all valuation levels. The precision of the multiples can be called into question due to the low number of transactions reporting values. What can be construed from the numbers is that valuations have decreased and sellers will need to adjust expectations to meet the current market conditions.


Strategic vs. Foreign Acquirers

Source: CapitalIQ

Not surprisingly, strategic acquirers remain the most active participants in the mergers and acquisitions markets. Corporations have maintained strong cash positions, providing them the opportunity to make selective acquisitions that help fill product/service lines or expand their geographic presence. Financial acquirers were forced to sit on the sidelines in many instances due to the challenging credit markets. The state of the credit markets forced financial buyers to pursue only the most attractive transactions since they would need to use more equity to complete the acquisition.

Outlook for 2009

While 1Q09 was challenging in nearly every respect, a glimmer of hope might be on the horizon. Acquirers are beginning to actively seek out acquisitions. Strategic and financial acquirers are proactively contacting companies and intermediaries to find the right opportunities. Both groups are being selective and moving forward with the companies that best meet their investment criteria. In 2009, there will be opportunities for companies seeking to sell, but the markets have created a challenging environment for success.

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Michael Rosendahl

Investment Banking
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