| ||||||||||
| ||||||||||
— Industry Insight —
Not surprisingly, valuation multiples for U.S. M&A transactions have plummeted as a result. For deals announced in the first six months of 2009, the median ratio of enterprise value to trailing Ebitda was 7.1 times, among deals with meaningful valuation data available. This figure was below median ratios of 8.5 times for the last six months of 2008, 9.3 times for full-year 2008, and 10.7 times for 2007, the recent peak year. Indeed, if deal valuations in the second half of the year match those for the first half, 2009 would feature the lowest median Ebitda multiple of the past decade. But the decline in valuations is not across the board. Valuations in some sectors are faring better than others, particularly in sectors with relatively stable cash flows and healthy growth prospects despite the volatile economic environment. For example, the median Ebitda multiple was 9 times for healthcare deals announced in the first half of 2009. Compared with other industry groups in this six-month period, healthcare valuations declined much less, supported by a slight increase in deal volume since the second half of 2008.
Valuations in the technology sector for the first half of 2009 demonstrated much of the same: less contraction and a continuation of premium multiples (median of 8.2 times) amid stable deal flow compared with the second half of last year. Conversely, sectors perceived as cyclical experienced larger than average declines in deal activity in the first half of 2009, depressing valuations further. The number of deals involving consumer-related companies fell by nearly one-third from second-half 2008 as risk-averse buyers avoided adding businesses hurt by waning consumer spending. The median Ebitda multiple for these deals was 6.3 times -- among the lowest for any sector. Similarly, the slowdown in industrial output was largely to blame for reduced industrial deal volume (down 25% from the prior six months) and a contraction in valuations to 6.8 times. With clouds of economic uncertainty still lingering, it's unclear what M&A activity -- and therefore M&A valuations -- will look like in the second half of 2009. However, since the start of the second quarter of 2009, we have seen encouraging signs that may portend an M&A revival beginning in the second half of the year. First, there have been critical improvements in the credit markets since March; positive fundamentals include robust levels of inflows and primary issuances in the high-yield and leveraged loan markets, tightening spreads and falling LIBOR floors, the TED spread returning to normal levels and significant rallies in secondary trading. Second, the equity market rally has injected a boost of confidence across markets. Equity issuances have been targeted for shoring up balance sheets and providing capital for acquisitions. The improvement in equity valuations will buoy M&A valuations, as public company comparables are a key M&A valuation benchmark. Third, although the economy is sending mixed signals, a more optimistic tone emerged in the second quarter that the worst may be behind us. This has allowed sellers to more confidently project future results while enabling buyers to believe these projections are credible. In fact, data for deal activity in the second quarter and the first part of the third hinted at improvement in M&A trends. While still negative, monthly deal count comparisons in the second quarter were much less severe. For example, the number of announced U.S. deals in June decreased by 12.2%, the lowest monthly decline since September 2008. For the middle market, the June decline was only 1.1%. Deal volumes for July and preliminary data for August also indicated an improvement in M&A trends relative to early 2009. Also encouraging was the recent uptick in median Ebitda multiples. Multiples plunged from 9.8 times in the second quarter of 2008 to 6.9 times by first-quarter 2009. But in the second quarter, the ratio increased to 7.5 times, higher than the last two quarters and possibly reflecting an improved valuation environment. Although the environment remains challenging, these recent signs of progress may be the breath of fresh air needed to resuscitate the M&A market in the second half of 2009. n Howard P. Lanser, director of mergers and acquisitions, and J. David Cumberland, director of M&A research, work in investment banking at Robert W. Baird & Co.'s Chicago office. |
It's no secret that M&A activity has slowed significantly in the past year. A credit crisis coupled with a global recession has caused many sellers to choose to weather the storm rather than sell. Similarly, would-be buyers have decided not to pursue targets until confident that a bottom has occurred.
|
|
|
|
|
