M&A Activity Seen Holding Up Despite Credit Crunch
While the recent credit crunch is likely to curtail large buyout deals this year, mergers and acquisitions in the middle market should continue apace, according to Piper Jaffrey. The feverish pace of M&A activity continued unabated during the first two quarters of 2007, as mega-LBO transactions dominated the headlines, Piper writes in its Middle Market M&A Outlook 2008. “Despite the credit crunch that curtailed dealmaking for large buyouts since mid-2007, M&A activity in the U.S. continues to be strong through the third quarter of 2007. “
We feel M&A activity in 2008 will represent more of a correction, yet not dip to the recession levels of 2002 and 2003.
Large deal activity will likely be the hardest hit, as the “mega-buyouts” will have difficulty securing financing, particularly in the first half of the year, Piper predicts. Yet overall, private equity firms are still willing buyers of strong companies with plenty of capital to put to work, and the key to the 2008 M&A market will be the health of the economy.
Despite the downturn, the middle market continues to be active, largely insulated from the credit influences associated with the mega-deals. The domestic middle market—transaction values in the range of $50 million to $500 million—again was an active segment of the broader M&A market through the first three quarters of 2007, Piper says.
Many of the key factors that drove results over the second half of 2007 are predicted to continue impacting M&A market momentum through 2008. These drivers include an uncertain economic environment, excess capital from both strategic and financial buyers,and expanding holding periods by private equity investors.
The continued participation of the private equity community is especially important to middle market M&A activity, Piper notes. The favorable market conditions of 2006 spilled over into the first half of 2007, yielding another record year for private equity and LBO transactions. LBO volume over the first nine months of 2007 has already outpaced the 2006 full year total, driven once again by large, take-private transactions.
Although all signs point to a slowdown in deal volume in 2008 as financing for large LBOs will remain challenging, it is unlikely we will see the collapse of the market that some fear.
Foreign buyers will play an increasing role as large foreign companies seek to take advantage of the cheap dollar to expand their global capabilities, Piper predicts. ” Strong financial performance and significant levels of cash, combined with potentially lower target valuations and lower leverage multiples for private equity buyers, should enable strategic buyers to remain highly acquisitive in 2008.”
McKinsey agrees that the M&A boom may not be over despite the credit market turmoil. In its wrap-up of 2007 M&A activity (subscription required) the McKinsey Quarterly notes that most of the decline in M&A since August was concentrated in private-equity deals; corporate acquisitions continued apace.
In a market characterized by tighter credit and a heightened appreciation of risk, this M&A boom will continue only if the more fundamental forces behind it, such as the surging activity of acquirers in emerging markets and increasing cross-border activity, continue as well, McKinsey says.
…suggestions that the M&A boom has met its demise may be premature.
Furthermore, dealmakers largely continued to exert greater discipline in M&A, as evidenced by metrics for the value that deals created and by the smaller number of acquirers overpaying for acquisitions, McKinsey notes.
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