M&A Pros Expect a Closer Buyer-Seller Alignment in 2003: More Businesses to Be Put on the Block

Middle-market dealmakers were spotting bullish glimmers within the m&a marketplace that boded for an uptick in mid-sized m&a volume as they approached 2003. Although no front-line player was ready to forecast an unrestrained resurgence, battle-tested market veterans said that the historical dynamics needed to move activity off the bottom were starting to coalesce. These include everything from stabilization of deal valuations and closer alignment of buyer and seller perspectives to key timing elements on both sides and slightly better financing conditions. How much the market recovers, they caution, ultimately will depend on whether it will get any help from the “big three” macro drivers – the economy, the stock market, and the credit markets. In a lengthy assessment of middle-market prospects, U.S. Bancorp Piper Jaffray says that a likely expansion in the supply of targets should stoke more transactions. The firm said that during the last two years, activity was packed into the two extremes of mid-market businesses – the highest-quality companies that commanded generous premiums, regardless of surrounding conditions, and the distressed companies, most of which have been picked off, if they were worth taking on. The broadest middle-ground segment – the “good” companies – have been scarce but should resurface in large numbers given such longstanding drivers as aging ownership, growth constraints, and the weakness in the IPO market. Piper Jaffray sees supply strengthening from these key sources: Divestitures – Large companies with excess baggage are not as likely to wait out a weak environment, and are “more willing to accept market clearing prices.” Private Companies – Sellers have accepted current market conditions on pricing and valuation and buyer and seller expectations now “generally fall within a more closely shared range.” That should loosen up seller adamancy on pricing. Private Equity – LBO firms should be active on both sides of the marketplace. As buyers, they retain large war chests of equity capital and have been putting more equity into transactions to get them done. A two-stage process for selling portfolio companies is predicted. The first, now underway, involves the sale of the strongest portfolio companies. In the second wave, sponsors will be shedding businesses picked up over the last few years that have needed rescue efforts after an initial postacquisition drop in performance because of the slack economy. Public Companies – Look for more going-private transactions, especially for small and mid-cap firms that haven’t been able to score in the stock markets and firms, regardless of size, that fared poorly after going public. With the new Sarbanes-Oxley and other compliance pressures, the cost of remaining public is becoming prohibitive and should induce more mid-size firms to fade back into the private arena. Members of the International Association of Merger and Acquisition Professionals (IMAP) who echoed the report anecdotally reported increased numbers of mid-market companies in a range of industries and situations putting themselves up for sale. Rod Klammer, who heads OEM Capital in Westport, Conn., said that a “flood of IT companies,” mostly software firms, have hit the market. “Our impression is that larger corporations are slashing their IT budgets and the smaller servicing companies are becoming squeezed,” he said. “There is a real dichotomy, however, because IT shops that are specialized continue to be in demand.” Scott Eisenberg of Birmingham, Mich.-based Amherst Capital Partners, reported more activity being generated by troubled auto industry companies that are in bankruptcy and “selling their assets in auction fashion under Section 363 reorganization.” Fleet Capital Corp.’s annual survey of CFOs at mid-market manufacturers found optimism for some recovery in the economy in 2003 – with nearly 70% projecting an upturn – but little interest in m&a. Only 18% of respondents expected their firms to be involved in a merger, acquisition, or divestiture in 2003.