M&A Market Update
U.S. M&A market activity significantly improved for the calendar year ended December 31, 2010 versus the prior year:
- Total deal volume increased approx. 24% from 9,242 deals in 2009 to 11,460 deals in 2010
- Total dollar value of deals increased approx. 21% from $636 billion in 2009 to $768 billion in 2010
Improved economic conditions, increased corporate earnings, and better liquidity all led to the improvement in 2010.
The anticipated expiration of Bush era tax cuts also contributed to M&A activity as business owners sought to capitalize on 15% cap gains rates. Ultimately, subsequent to the November elections, Congress announced a two year extension of the tax cuts as well as other measures to benefit lower and middle income taxpayers.
Corporations and Their $1T War Chest
According to Standard and Poor’s, the largest S&P 500 corporations held approximately $1 trillion in cash largely due to an improvement in earnings and a reduction in dividends, stock buybacks, and acquisitions. However in 2010, many corporations have increased their cash outlays with respect to these items :
- 255 companies in the S&P 500 announced a dividend increase versus 157 in 2009
- Stock buybacks have increased for five consecutive quarters, including a 128% increase from $35 billion in the third quarter of 2009 to $80 billion during the same period in 2010
- Acquisition spending increased 12% in 2010 versus 2009
Going forward, these companies will continue to deploy cash cautiously. A recent E&Y study (“Capital Conference Barometer”) found that 75% of companies will focus on organic growth initiatives in the coming year. Notwithstanding, this capital represents a significant potential economic driver.
Private Equity Sponsors Ramping Up Deal Activity
According to Preqin Data, private equity sponsors have approximately $444 billion (up from $425 billion in the 3rd quarter) in capital to deploy (excluding debt financing) with many facing near-term investment expiration periods. As such, private equity firms significantly increased their deal activity in 2010:
- Total leveraged buyout deal volume increased approx. 76% from 994 deals in 2009 to 1,753 deals in 2010
- Total leveraged buyout deal value increased approx. 116% from $80 billion in 2009 to $172 billion in 2010
On the sell side, private equity firms are again facing multiple exit opportunities through strategic sales, sponsor-to-sponsor exits, and even IPOs and leveraged dividends. In 2010, private equity backed companies raised $35 billion through IPOs or twice the amount raised in 2009 and approximately $3.3 billion through leveraged dividends according to Buyouts Magazine.
Credit Market Liquidity Better Than Expected
Credit markets continue to improve due to a recovering economy and increased competition among financing sources. Banks which drastically pared down their private equity leveraged lending operations during the credit crisis have resurfaced. Additionally, newer, non-bank senior lenders have emerged, flush with cash and unencumbered by troubled loan portfolios.
According to Buyouts Magazine, total debt to EBITDA multiples for middle market deals (<$500 million in Enterprise Value) totaled approximately 4x. Pricing for senior cash flow loans ranged from LIBOR + 500-550 basis points representing a decline of 50-100 bps from our 3rd quarter update, with LIBOR floors of 1.75%-2%. While equity contributions ranged from 40%-50% of total deal value, an increasing percentage of deals have been funded with 40-45% equity.
Optimistic, But Cautious Outlook for 2011
The same fundamentals which drove M&A activity in 2010 should continue to increase market activity in 2011. However, unemployment, housing, and reservations regarding governmental stimulus measures continue to create a backdrop of uncertainty.
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.