Hardly a week goes by without hearing about another mega public M&A transaction derailed due to softness in the credit markets. Yet lender gridlock for large M&A transactions belie the fact that midmarket transactions ($50 million to $200 million in value) continue to attract lenders and investors. We believe that 2008-2009 will be a good time for a private company owner to gain liquidity due to the following market factors:
- Private Equity War Chest Remains Strong: Midmarket private equity groups raised substantial funds through mid-2006 with estimates of $200 billion to $400 billion, and this capital is ripe for investment. While tighter credit conditions will slow down private equity compared to recent years, midmarket deals should remain a fertile hunting ground in 2008, particularly when levered with bank debt at a conservative 3 times.
- Interest from Foreign Buyers: In 2007, foreign investors spent a record $414 billion on stakes in American companies, up 90% over 2006 and more than double the average for the last decade (source: Thomson Financial). Buoyed by a weakening dollar, the interest of foreign buyers -- particularly from Europe -- will likely increase. Inquiries from foreign investors are already way up this year, and we anticipate seeing this trend continue.
- Public Companies Are Active Again: During 2006 and 2007, many strategic acquirers were outbid by private equity firms relying on accommodative credit markets. With nearly $600 billion in cash on corporate balance sheets (source: S&P) and strong treasury stock reserves built through stock buybacks, strategic acquirers are poised to reassert their supremacy in 2008.
- Increases for Capital Gains, Estate and Dividends Tax: With national elections a few months away, the timeline for an increase in the 15% long-term capital gains tax rate may accelerate from the current deadline of 2011 (regardless of the party affiliation of congressional majority leaders and of the new administration).
One recent deal that illustrates this point is the
acquisition of Mercury Instruments Inc., a privately held manufacturer of precision measurement and monitoring instruments. The Cincinnati-based company was acquired by Germany-based RMG Group, a portfolio company of Triton Partners, in December 2007. Mercury received strong interest from U.S.-based public companies, but in the end, Triton Partners, a European private equity group, won out by leveraging its capital war chest and the U.S.' weak dollar. We anticipate seeing similar circumstances and deals shape midmarket dealflow in the coming year. For more information,
click here. -
Patrick GoyPatrick Goy (pictured) has led M&A deal teams in more than 200 private company transactions over the last 30 years. Goy is a managing director at Lincoln International, a global investment bank specializing in providing merger and acquisition, private capital raising, fairness opinion and valuation services to companies involved in midmarket transactions.
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