Six Major Catalysts of M and A Today

Six Major Catalysts of M and A Today - Transcript

Six Major Catalysts of Today s M A Market
For anyone looking to sell a company today s M A market is ripe with opportunity Credit standards have loosened and cash rich strategic and financial buyers are competing aggressively for acquisitions giving sellers the ability to negotiate very attractive terms Given these conditions it s not surprising 2005 was the most active year since 2000 for global M A with total volume of approximately 2 9 trillion according to Dealogic This was a 38 percent increase over 2004 In addition U S M A activity surpassed 1 trillion in 2005 up from 886 billion in 2004 and many signs suggest even greater activity in 2006 Exhibit 1 Global M A Volume As prospective buyers and sellers consider M A activity this year it pays to understand the factors influencing this latest boom

Wide Open Debt Markets
Bank debt multiples have risen steadily from an average of 3 7 times EBITDA earnings before interest tax depreciation and amortization in 2001 to 4 3 times today a level that hasn t been seen since 1999 according to S P Leveraged Commentary and Data Exhibit 2 Average Debt Multiples of Highly Leveraged Loans The relaxing of credit standards is underscored by the Federal Reserve s Senior Loan Officer Opinion Survey on Bank Lending Practices in October 2005 which reported the percentage of banks loosening their credit standards is at its highest level in 10 years Default rates continue to decline and are at their lowest level in a decade according to PricewaterhouseCoopers

Purchase price multiples for mid market leveraged buyouts 50MM also are at a 10 year high S P Leveraged Commentary and Data reports the average is now 8 5 times EBITDA up from 5 9 times in 2001 Exhibit 3 LBO Purchase Price EBITDA Multiples Although it varies from industry to industry middle market purchase price multiples consistently have been in the range of 6 0 to 7 0 times EBITDA and occasionally as high as 10 or 11

Supply Demand
The rise in prices is a function of demand with corporations private equity firms and hedge funds actively vying for deals Corporations have experienced continued earnings growth and are generating substantial revenue from operations Because they ve already taken excess costs out of their businesses many are finding organic growth to be challenging at this point In addition there s only so much cash they can return to shareholders through share repurchases or dividends so they re looking for bolt on acquisitions to expand their core competencies Strategic buyers along with other active market players are not only driving up the cost of M A they are impacting the strategies that private equity firms are using to raise funds structure transactions and win deals
For instance private equity sponsors are using less leverage and more equity Many sponsors today are putting in upwards of 25 percent to 50 percent of the purchase price With interest rates still near historic lows return on equity when compared to debt can be more attractive The use of more equity is also a function of the fact that there s so much capital on the sidelines In 2005 more than 172 billion was raised according to Standard Poor s
Big Buyouts
The advent of mega funds those topping 10 billion has also been a contributing factor to M A volume Funds of this magnitude have never before been assembled by private equity sponsors As a consequence buyout firms are positioned now to compete with corporations for virtually any size transaction and deals have gotten larger and pricier Exhibit 4 05 Global M A Deal Value by Range According to Dealogic nine of the 10 biggest private equity transactions ever were announced in 2005 In addition there s been an increase in clubbing which allows private equity firms to team up to pursue exceptionally large buyouts with a safety in numbers mentality Clubbing gives private equity firms access to more diversified experience to help win the deal while allowing them to spread the risk

Hedge Funds
Hedge funds have entered the fray too While historically short term oriented investors hedge funds today are looking for returns wherever they can find them and locking up money for longer periods of time They are now active in leveraged buyouts often as the lead lender They re also buying equity at auctions when a member of a private consortium is looking to exit but isn t able to find a bidder at the right price Hedge funds typically have the ability to provide their own acquisition financing giving them a competitive advantage over most other buyers In addition they often aren t limited in terms of industry concentration or investment size As such they are quickly offering formidable competition to some private equity firms which inevitably places pressure on pricing and the auction process as a whole
Dispersion
Today s M A activity is not concentrated among just a few industry segments Unlike the late 90s when the action centered on media telecom and technology activity is now distributed across a wide variety of industries including energy utilities and financial services Activity is also distributed more broadly geographically At more than 1 trillion in 2005 European M A volume was 49 percent higher than the 729 5 billion reported in 2004 according to Dealogic As in the U S telecommunications was the most active sector in 2005 Furthermore Asian Pacific M A activity hit a record 474 3 billion a 46 percent increase from 324 5 billion in 2004
Not only has the M A playing field expanded the speed in which deals get done has accelerated For instance institutional investors such as hedge funds or second lien issuers now simply buy a whole company take it off the street and then parse out the deal later rather than arranging the financing with four or five partners before closing the sale Another factor that is speeding the time involved is staple financing During the 90s lenders typically wouldn t provide financing without knowing who was going to own the enterprise Not so today Because competition is so intense investment banks that represent the seller often arrange financing for any buyer up to a certain level This so called staple financing since it is attached to the agreement enhances the sale by giving sellers a ready idea of how much leverage a buyer can put on the table Previously a sponsor would look at a deal evaluate it and then bid on it before arranging the financing With staple financing the deal already has been run by a lender
Capital Structures
There are so many different financing alternatives today that the final structure for any given transaction often becomes an alphabet soup of capital layers Deals typically start with a senior secured loan followed by a senior stretch piece then a B loan may get layered in after that a mezzanine strip and finally equity at the bottom During the 90s cash flow lending was king but today both cash flow and asset based facilities are popular ways to finance a merger or acquisition
For example there are a number of middle market manufacturers that are struggling under the weight of high energy and transportation costs Those that are operating on the margin are finding that attractive cash flow financing is unavailable to them Alternatively they re investigating the asset based lending market Rather than being concerned about potentially violating a cash flow covenant when the market inevitably turns these borrowers are opting for asset based financing because of the flexibility it offers over the long haul
Second lien loans also have gone main stream Originally used by companies that wanted to refinance but were unable to obtain capital from traditional sources today second liens are used for an array of reasons and are part of virtually every M A transaction While they are readily available and offer attractive returns to investors in some cases hedge funds will use second liens as a strategy to gain control of companies in the event of default After a bankruptcy it s typically the senior note holders that are left with the majority ownership of the company Hedge funds can often buy these securities at a significant discount prior to the bankruptcy filing
Outlook
The pace of M A activity is expected to continue or even accelerate in 2006 If 2005 is any indication energy utilities retail and finance will be among the hottest industry segments Technology on both the hardware and software side also is expected to make a comeback as slow growth companies sell to competitors who are better positioned
A number of the transactions in 2006 may be distressed due to escalating energy and transportation costs and the new bankruptcy law which gives certain companies notably retailers less time to restructure As a consequence hedge funds with their available liquidity risk tolerance and agility will likely become more active acquirers Meanwhile buyout firms and corporations are expected to continue moving aggressively to take advantage of high cash levels and low interest rates As long as cash is abundant and borrowing costs remain low purchase prices should remain generous
Asset based lenders will likely continue to see a steady stream of deal flow from distressed companies to borrowers that are more comfortable with a credit facility that s designed to ebb and flow easily with the peaks and valleys of their businesses Second liens should remain a fixture and staple financing should gain momentum In short competition is intense and the appetite for mergers and acquisitions is voracious With attractive credit markets broad based industry participation and greater geographic reach the fundamentals are in place for a strong M A showing in 2006
By HYPERLINK http corp bankofamerica com public public portal pd page label products abf about exec psw Dan deBrauwere President Pacific Southwest Division
Bank of America Business Capital