20 Dec Buyer’s Market? Or Seller’s Standoff? A Look At The Numbers
Several posts this year – the most recent one here – have noted the general buyers’ market prevalent for strategic buyers shopping for distressed M&A.
A recent CFO.com article drives home the same point, but with more specificity . . . and an important caveat. Kate O’Sullivan’s piece entitled “Strategic Buyers Still in the Catbird Seat” observes that though overall M&A activity has been off by as much as 1/3 from 2008 levels, strategic buyers closed 94% of this year’s deals. Strategic buyers appear to have a continued advantage heading into 2010, and – as was the case this year – distressed assets are expected to comprise a significant portion of next year’s deal activity.
However, the current buyers’ market is not necessarily a bargain-hunters’ bonanza. Though a recent survey by the Association for Corporate Growth (ACG) and Thomson Reuters (summary available here, with statistical summary here) suggests a modest pick-up in transactional volume for 2010, O’Sullivan (citing the ACG data) notes continued constraints on credit and – perhaps more importantly – a fundamental disconnect over valuations buyers and sellers are willing to accept.
Either or both factors may hamper any significant increase in deal volume over 2009, but the ACG survey suggests that pricing multiples may be the sticking point for many deals. “[M]ultiples for middle-market transactions in general have fallen markedly, from a high of 10.1 times EBITDA (earnings before interest, taxes, depreciation, and amortization) in 2007 to 8.4 times EBITDA today, according to survey respondents. They may go still lower: 80% of respondents say they expect to pay no more than 5 times EBITDA for targets in the next six months.”
Not surprisingly, most sellers will be reluctant to sell at prices reflecting just half the multiple they could have obtained only 36 months ago: “37% of survey respondents cite valuation problems as the biggest hurdle for deals right now. ‘Sellers try to argue that you shouldn’t look at the current environment when valuing their company, that it’s just a bump in the road. But buyers are reluctant to buy that argument,’ says [ACG Chairman Den] White.”
What buyers will buy remains to be seen. Stay tuned for a fascinating 2010.