Outlook for M&A Deal Volumes and Valuations in 2012

Outlook for M&A Deal Volumes and Valuations in 2012

Tulsa Business Journal Article: http://tulsabusiness.com/main.asp?FromHome=1&TypeID=1&ArticleID=53468&SectionID=3&SubSectionID=50

Approaching a forecast for M&A activity for the coming year, we have drawn upon historical transaction data, as well as broader surveys of business leaders, professionals and lenders. In this article, we consider deal volumes, valuations, leverage multiples, as well as demand from strategic buyers and financial buyers.

In terms of deal volumes, the number of middle market M&A deals in the last three years has been fairly consistent, with quarterly fluctuations of 5 to 10%, according to Thomson Reuters data. On an annual basis, the fluctuations have been less noticeable with only a few percentage points swing from 2009-10 and 2010-11 and only a slight positive trend.

If you compare 2011 to the all-time high of 2007, the number of M&A deals would be down only 28% for the full year, and in terms of deal value, 2011 would be down only 22% over 2007. All things considered and with the weak performance of the US economy, we see this as a robust performance for M&A activity in the last three years and a strong foundation for M&A activity in 2012.

During the period from 2009 to Q3 2011, while the volume of M&A deals only increased by a few percentage points, the average deal size increased approximately 70%, which can be attributed in part to higher valuation multiples, an increase in leverage for acquisition financing and greater business confidence. On the basis of this robust recent historical performance, as well as strengthening fundamentals that drive M&A activity, it seems reasonable to expect strong M&A valuations in 2012.

From a recent Pepperdine Private Capital Markets survey of industry professionals, 55% of investment bankers expect M&A deal volume to increase in the coming 12 months, with 27% expecting stagnant volumes and only 17% expecting deal volumes to decline. 40% of those surveyed expect valuation multiples to increase in 2012, with 34% expecting stagnant valuation multiples, and 27% expecting a decrease. Overall, another positive indicator for next year.

From our perspective at ClearRidge, we saw an increase in demand from strategic buyers in 2011 and expect this to continue through 2012. In terms of premiums for strategic buyers, 81% of investment bankers from the Pepperdine survey reported a strong purchase price premium paid by strategic buyers in the last six months, with 31% of investment bankers reporting a valuation premium of 21% or more. One factor in increasing valuations from strategic buyers is to have competing purchase offers from both strategic and financial buyers, which can be helpful in negotiating a higher purchase price.

The above notwithstanding, there continues to be strong demand from private equity buyers and data from PitchBook estimates that as of the 3rd quarter of 2011, there was $450 billion of free cash to invest at US private equity groups, which continues to be a strong driver for both M&A values and volumes.

In terms of leverage multiples for loans, which can be an indicator of deal valuations, 38% of commercial lenders in the Pepperdine survey reported lending multiples increasing in the last six months, with 54% reporting stagnant multiples and only 8% reporting declining multiples.

When you compile this information and try to lay out a forecast for 2012, most of the fundamentals point to a robust year for M&A deal volume and valuation multiples. So, if you’re looking to sell your business in 2012, it could be another good year.