The past nine months has been an interesting ride in middle market M&A. Fine, seemingly solid companies with soft financials get little activity, while companies with strong financials get more offers (30 or more!) than a few years ago. This will change (and in fact already shows signs of change), and I will be glad when it does.
Here are two examples:
We brought a company to market last year, a solid company in a recession resistant industry. Our initial marketing efforts went as planned, and we had very healthy interest in the company. But the recession deepened, and while the company was recession resistant, it wasn’t recession proof. Interest waned and values in the offer letters dropped when the company’s financials softened in January and February of 2009. You can easily see the buyer’s point of view and the big question just hanging there: “How stable are revenue and earnings?” The company isn’t in trouble in any sense. The owner has decided to take a hit in earnings in order to keep good employees employed, and that noble decision affects the value. Thus he has decided to wait a year before going back on the market.
Compare this to the company we are marketing currently. Performance has not waivered, and interest in the company is very strong, both in private equity groups and strategic buyers. We have received numerous offer letters and the offering prices are very good. One private equity manager told me values are down and he expects to pay 4 times earnings for his acquisitions. Well, he’ll miss this one, and it is hard to imagine values could be down very much across the board for performing companies when there is so much competition on the buy side.
This bipolar activity will change as both industries and individual businesses show some history of stable revenue and earnings. For example, the Blackstone Group and other PE groups have started a separate $780 million fund called Summit Materials, focused on acquiring building material businesses. We didn’t see a fund like this when the building material businesses were crumbling and the bottom wasn’t in sight. It is only now being created, when most of turmoil and decline has already taken place and there is a clear path to daylight.
If you own a company that has been hit by the recession – hang in there. You will not have to have three to five years of stable earnings that were valued so highly in the past, but you will need some evidence that your earnings are stable and better days are ahead.