ACG-Thomson Reuters Year-End 2009 DealMakers Survey Indicates Obstacles and Opportunities for M&A and Private Equity Investing

Merger professionals from Ohio say the current M&A environment remains moribund, yet express guarded optimism about a pickup in the first half of 2010, with strategic investors leading the way.

The latest twice-yearly survey by the Association for Corporate Growth (ACG) and Thomson Reuters reveals that negative sentiment about the dealmaking environment has not changed during the last year, with 94 percent of dealmakers from Ohio saying the current M&A environment is fair or poor.

Over the next six months, however, 79 percent of dealmakers from Ohio expect an increase in merger activity.

The ACG-Thomson Reuters Year-End 2009 DealMakers Survey polled investment bankers, private equity professionals, corporate development officers, lawyers, accountants and business consultants in October and November 2009.

Some 85 percent of survey respondents indentified the current environment as a buyer's market. 83 percent of respondents said the current market favors strategic investors. And 94 percent of respondents expect strategic investments to accelerate in 2010. 52 percent of respondents are actively pursuing distressed and undervalued companies.

In a release the company noted that dealmakers expect the following percentage of M&A deals to be distressed in the first half of 2010:

- 0-10 percent (4 percent)

- 11-25 percent (29 percent)

- 26-50 percent (53 percent)

- More than 50 percent (13 percent)

"Overall sentiment remains negative, but Ohio dealmakers report that dealmaking discussions have picked up in the last 2-3 months as financing markets have stabilized," said Patrick Gallagher, president of ACG Cleveland and senior vice president of Edward Howard. "As the survey results show, dealmakers expect increased activity to take hold in 2010 as year-over-year comparisons show positive momentum, a critical component in getting buyers and sellers to the table."

While the credit crunch has decreased in importance as the biggest obstacle to M&A activity (35 percent), the gap between the prices at which companies are willing to sell and the prices that buyers are willing to pay has been rising in importance (26 percent).

Although average middle-market EBITDA levels have fallen to 8.4 today from a high of 10.1 in 2007, dealmakers are still looking for bargains. In fact, 87 percent expect to pay no more than 5x EBIDTA for companies over the next six months.

Ohio dealmakers expect the following sectors to experience the most merger activity in the first half of 2010:

- Manufacturing and distribution (35 percent)

- Healthcare/life sciences (20 percent)

- Business services (15 percent)

They expect the following sectors to experience the most organic growth:

- Healthcare/life sciences (31 percent)

- Government-related (18 percent)

- Technology (16 percent)

According to Thomson Reuters, the volume of all worldwide mergers and acquisitions totaled $1.8 trillion in announced deals through November 30, a decrease of 33 percent over the comparable period in 2008. Of this total, M&A deals in the mid-market, defined by Thomson Reuters as transactions under $500 million, fell 31 percent from the 2008 level, totaling $461.9 billion.

Through November 30, strategic M&A activity totaled $1.7 trillion, a 32 percent decline from the comparable period in 2008. Overall, strategic merger activity accounts for 94 percent of total announced M&A this year, the highest percentage since 2001.

Dealmakers See Improved Debt Markets, But Plan on Increased Equity

Dealmakers are optimistic that the debt markets will continue to rebound, with 60 percent saying they will improve over the next six months, 38 percent saying they will remain the same and 2 percent saying they will worsen.

Respondents say the maximum leverage level in today's environment is:

- 1-2x (31 percent)

- 2-2.5x (41 percent)

- 2.5-3x (22 percent)

- 3-3.5x (6 percent)

- More than 3.5x (0 percent)

Most deal professionals (51 percent) expect leverage levels to decrease in the next six months.

Despite an expected improvement in access to credit, 56 percent of dealmakers expect to put more equity into deals over the next six months, with almost half (45 percent) saying they expect to invest 41 percent or more equity in companies in the next six months.

Private Equity Eyes Opportunities

Dealmakers say the best strategy for success in the current environment is:

- Focus more on add-on acquisitions than platform acquisitions (21 percent)

- Focus more on deal sourcing/marketing (13 percent)

- Focus on our portfolio companies (13 percent)

- Cut costs at our portfolio companies (13 percent)

Industries that present the best opportunities for buyouts are:

- Manufacturing and distribution (35 percent)

- Healthcare/life sciences (20 percent)

- Business services (12 percent)

- Consumer products and services (12 percent)

Industries that present the best opportunities for distressed investing are:

- Manufacturing and distribution (50 percent)

- Real estate (18 percent)

- Consumer products and services (8 percent)

- Financial services (8 percent)

- Retail (8 percent)

Respondents say they have written down their portfolio company values in the last 12 months by:

- 15 percent or less (26 percent)

- 16-25 percent (17 percent)

- More than 25 percent (17 percent)

- Held steady (39 percent)

- Marked up (0 percent)

More than half (71 percent) of private equity professionals say they expect to maintain portfolio company values at year-end 2008 levels; while the remainder forecast write-ups over 2008 year-end levels of:

- 15 percent or less (19 percent)

- 16-25 percent (10 percent)

- More than 25 percent (0 percent)

65 percent of respondents say that 51 percent or more of their portfolio companies are performing below their prior year in EBITDA.

In 2010, private equity will change in the following ways:

- Significant consolidation, winnowing out (48 percent)

- Increased need for PE firms to differentiate themselves (32 percent)

- No change (16 percent)

Some 35 percent of respondents are concerned about the public's perception of private equity.

"The value of middle market private equity comes through loud and clear in this survey," said Gary A. LaBranche, CAE, ACG President & CEO. "Even as the growth community works to recover from the Great Recession, dealmakers are confident in the future of free enterprise and the job growth and opportunity that it provides to society. That speaks volumes about why middle market private equity is so vital to our economy."

The twice-yearly survey, conducted in October and November 2009, was completed by 921 ACG members and Thomson Reuters customers, including 48 from Ohio. Respondents from Ohio were comprised of private equity, venture capital and buyout firm members (21 percent); investment bankers, intermediaries, brokers (25 percent); lenders, finance providers (8 percent); and service providers, such as lawyers, workout specialists, accountants and consultants (46 percent).

The Association for Corporate Growth (ACG) is the global community for middle market M&A dealmakers and business leaders focused on driving growth.

Thomson Reuters is a source of intelligent information for businesses and professionals.

More Information: www.acg.org.

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