State of the M&A Markets – Q4 2009

After a challenging start, 2009 ended with some positive momentum. Expectations going into the year were low due to the severe economic downturn experienced at the end of 2008. As the year progressed the M&A markets became more comfortable with the state of the economy and the initial stages of the recovery. During 2009, activity improved leading many to believe that 2010 has the potential to be a better year for M&A transactions. Additionally, a new report from Towers Watson and Cass Business School determined that publicly traded companies which undertook acquisitions in 2009 outperformed the market, providing evidence of the value acquisitions offer.

Market Activity

Transaction activity continued to increase in the fourth quarter with total deal volume at their highest levels since 3Q08. Valuation multiples also reached the high for the year in nearly every range during 4Q09. Deals with an enterprise value between $100 million and $250 million as well as $50 million and $100 million experienced the greatest expansion. Total transactions increased by 100% and 74%, respectively in these segments in 4Q09 versus 3Q09. Growth in transaction volume for deals under $50 million and over $250 million also increased, but not at the same pace. Over the same period, transactions under $50 million increased by 19.3% while deals over $250 million improved by 10%. The expansion in all sectors was helped by strategic acquirers continuing to be more active in addition to private equity groups finding ways to finance transactions through increased equity contributions and alternative deal structures.

Valuations have improved in nearly every segment since 2Q09. The greatest improvement was in the $50 million to $100 million segment, valuation multiples increased from 6.7x EBITDA in 3Q09 to 11.3x EBITDA in 4Q09 and are substantially higher than the low of 4.0x EBITDA in 1Q09. Valuations in 4Q09 seem high for the current market and valuation range, but the trend in this sector has been strong. The only segment that has decreased during 2009 is the $100 million to $250 million range. In this segment, valuations decreased from 9.8x EBITDA in 2Q09 to, a still respectable, 7.7x EBITDA in 4Q09. The lower valuations might be a result of some of the ongoing challenges in the lending markets. Multiples for transactions over $250 million have benefited from large stock components as well as very healthy and well established corporations ability to tap the debt markets.

Strategic and financial acquirers remained active in 4Q09 in both dollar and volume terms. Strategic acquirers continue to drive the market as private equity groups grapple with the debt markets. In 4Q09, strategic acquirers increased their investment in acquisitions by 87% over 3Q09. The total number of transactions increased by 22% for private equity groups and 21% for strategic investors, a healthy increase over 3Q09. The systematic growth in transaction activity by strategic acquirers throughout 2009 appears to be a sign that the marketplace is improving.


The outlook for 2010 is cautious, but positive. Many business owners opted not to contemplate a sale in 2009 due to the state of the economy. Now that we appear to be on the other side of this recession many business owners are evaluating their liquidity options and a sale is more appealing.

As the data demonstrates, buyers of all stripes are becoming more active. Many acquirers took a tentative approach to first half of 2009 and, as the year progressed and an economic recovery seemed more certain, undertook more transactions. Acquirers should continue to be more committed in 2010 although valuations, while improving over 2009, will remain lower than the levels experienced during the previous boom.

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Michael Rosendahl

Investment Banking
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