M&A Market Update
Despite a challenging environment toward the latter half of 2011 marked by a U.S. credit rating downgrade by S&P, prolonged weakness in the U.S. housing and employment markets, and European sovereign debt crisis, total U.S. M&A activity remained relatively stable after a strong 2010:
- Total deal volume increased approx. 6.0% to 8,551 deals for the twelve months ending December 31, 2011 from 8,065 deals during the comparable period in 2010
- Total deal value was essentially flat, totaling approximately $645 billion in 2011 versus $647 billion in 2010
As experienced in fiscal 2010, several fundamental market dynamics supported sustained market activity in 2011.
Well-Capitalized Corporations Seeking a Quicker Path Towards Growth
According to the Federal Reserve, non-financial U.S. corporations have approximately $2 trillion in cash. Such capital can be deployed internally with new employee hires or plant expansions/improvements, or alternatively, through stock buybacks, dividend payouts, or acquisitions. With improved balance sheets and the headwinds of the global financial crisis largely behind them, corporations have increasingly turned to acquisitions as an avenue for accretive growth in a relatively anemic environment of annualized GDP growth of less than 1%. Such acquisitions have typically taken the form of smaller, tuck-in type deals as many corporations have been hesitant to pursue larger, riskier deals given the mixed economic news in the U.S. and abroad. Additionally, there has been a decline in larger public company deals, where stock (versus cash) represents a considerable percentage of total deal consideration, given the volatility in public stock market valuations.
Many sellers have also emerged, bolstered by improved corporate earnings and market liquidity, as well as heightened anxiety about the potential for capital gains increases in 2013.
Leveraged Buyout Firms Remain Active
For the calendar year 2011, LBO activity declined (4.9%) from 1,828 deals in 2010 to 1,738 deals in 2011. While volume declined, overall LBO activity was still strong given the growth experienced in 2010. With record funds raised from 2006-2008, private equity firms are now sitting on approximately $425 billion in equity capital with many funds nearing their investment expiration dates . Additionally, while retreating during the second half of 2011, the leveraged lending markets continued to support private equity deal flow. Overall, total sponsor equity contributions increased slightly from the first half of 2011 to 40-50% of total purchase price, with total debt to EBITDA multiples of 3.5x-4.0x for deals less than $500 million .
Sponsor firms are also currently invested in approximately 4,200 mature portfolio companies. This will drive considerable M&A activity as firms seek to book gains and return capital to their limited partners in preparation for upcoming fund raises.
Global Economic News Creating Uncertainty and Challenges
During the second half of 2011, news in the U.S. and abroad challenged the market’s confidence:
- In August 2011, S&P stripped the U.S. Treasury of its triple-A rating renewing fears of a double dip recession and causing widespread concern that an increase in Treasury borrowing rates would have a corresponding impact on governmental, corporate, and individual borrowing rates; Moody’s and Fitch, however, maintained their top U.S. credit ratings
- The U.S. housing market continues to struggle – housing prices are off 33% from their 2006 highs and one in four mortgages are underwater. According to Fed Chief Bernanke, “the loss of housing wealth may be chopping $200 billion to $375 billion off of consumer spending per year” 
- While the unemployment rate in December 2011 fell to 8.5% representing its lowest level since March 2009, the unemployment rate remains well above historical levels of approximately 6% 
- The European sovereign debt crisis has far reaching implications: 1.) financially distressed countries such as Greece, Portugal, Italy, and Spain are implementing historic debt restructurings and/or austerity programs; 2.) the contagion is spreading to other healthier Euro countries in the form of reduced investor confidence and higher borrowing costs; 3.) financially stable countries, most notably Germany and France, are tasked with leading the bailout of troubled countries or otherwise face a potential systematic breakdown of the Euro and its member nations; and 4.) non Euro nations with extensive trade ties to the region are anticipating a considerable slowdown in total trade activity.
BellMark Partners, LLC is a boutique investment banking firm that provides financial advisory and investment banking services to middle market and lower middle market companies in the consumer, industrial, business services, and healthcare industries. BellMark advises family businesses, entrepreneurial or closely-held companies, private equity-owned companies, and small-cap public companies on M&A advisory, strategic alternative reviews, restructuring assignments, and valuations & fairness opinions.
Source: Pitchbook;  Reuters;  Bureau of Labor Statistics
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