State of the M&A Markets – Q2 2009

Merger and acquisition activity began to pick up in 2Q09 as markets bounced back from the low experienced in 1Q09. After the substantial drop off from 4Q08 to 1Q09, M&A activity increased as more buyers and sellers tested the market. Financial and strategic acquirers began to actively seek opportunities across nearly all sectors due to the widely held assumption that transaction values have decreased, providing the opportunity for higher returns. This belief, coupled with substantial capital waiting to be deployed, should help increase activity in the coming months. Additionally, business owners, having lowered their valuation expectations, should see an opportunity to affiliate with a well capitalized partner that can help position their company’s future growth when the economy rebounds, as well as pull some money out of their company.

Market Activity

Deal activity improved in all valuation segments. Transactions with values between $100 million and $250 million experienced the greatest increase, improving 45.7%. Transactions above $250 million underwent the smallest expansion, increasing 2.0%. Growth in transactions below $50 million was 11.6% while transactions with a valuation between $50 million and $100 million improved 22.2%. Deals under $250 million experienced the largest growth due, in part, to the difficult credit environment that has made financing for transactions above this threshold difficult, forcing buyers to focus on transactions under $250 million.

In addition to deal levels improving, valuations have started to either improve or level off. Valuations for transactions between $100 million and $250 million underwent the greatest improvement in value, increasing from 3.3x in 1Q09 to 9.8x in 2Q09. The depressed level in 1Q09 seemed abnormally low, bringing into question the reported data. The valuation level in 2Q09, while high, is historically in line with multiples for this segment.

Interestingly, financial acquirers became more active in dollar terms. Private equity groups undertook transactions totaling $9 billion in 2Q09 versus $5 billion in 1Q09, the highest level of activity since 3Q08. Even though transaction values increased for financial acquirers, the total number of transactions decreased from 180 in 1Q09 to 170 in 2Q09. Financial acquirers also accounted for approximately 10% of all deals on a value basis up from 1.9% in the previous quarter. Strategic acquirers increased the total number of deals in 2Q09 versus 1Q09, improving from 1,636 to 1,667. While the total number of strategic transactions increased in 2Q09, the value of these transactions decreased substantially. The drop off is primarily due to the large number of multi-billion dollar deals that took place in the pharmaceutical sector during 1Q09.


It is a positive sign that activity and valuations are beginning to improve. Transaction levels are still not near the levels seen in previous periods and probably won’t be for some time, but there are factors that should help improve these levels going forward. Financial and strategic acquirers are beginning to actively seek out quality companies to acquire, creating competition for companies. Both groups have capital that they want to put to work and are trying to find the right companies. While there are numerous groups looking to make acquisitions, the bar to acquire companies has been raised. Until the economy is well on its way to recovery, activity will improve but it will not achieve the levels once seen for quite some time.

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Michael Rosendahl

Investment Banking
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