Private Firms Eye M&A Prospects

While their big-company, public brethren hold back, mid-sized, private concerns are ratcheting up their interest in acquisitions. Their aim, according to a survey conducted in February, is to jump-start growth in a flat economy. Three of eight respondents, or 37%, reported plans to do an acquisition within a year, up from 32% in a similar survey done in early 2001. Another 23% of sampled companies said they had acquisition in their plans for the next three years. The annual survey is conducted by DAK Group, a middle-market investment banking firm based in Rochelle Park, N.J., and the Rutgers University School of Business. The 2002 survey included 418 private companies with sales of $5 million to $100 million. More than three-quarters of those planning a near-term deal, or 77%, cited growth as the primary reason for acquiring, with 51% seeking product diversification and 33% attracted by the opportunity to buy a competitor. DAK president Alan Scharfstein noted that pricing is working in favor of acquisitions by closely held companies. Multiples did not explode in the post decade as they for public companies, he said, and “remain quite low in relative terms.” “There are excellent opportunities for well-capitalized acquirers to satisfy strategic needs at attractive valuations,” he said. On the sell side, less than one in 10 entrepreneurs, 9%, expect to sell their businesses in the next year, although 30% see a cash-out within three years. More than half of the respondents, 52%, believe that the values of their companies had declined over the last year, with about a third, or 34%, estimating that value had increased. The erosion was foreseen as reversible, with a full three-quarters, or 75%, forecasting that their firms would be more valuable a year from now. In an expression that could impact both buy and sell plans, the respondents projected continued consolidation in their industries. Nearly half, or 48%, forecast fewer players in their fields over the next three years – a substantial rise from the 34% that looked for contraction a year earlier.