So far 2011 is turning out to be a great year if you are an equity firm. Assuming that you are one of the dozens of equity firms sitting on accumulated cash (on a combined basis it is estimated that U.S. equity firms have nearly $500 billion to invest), you are making a much more aggressive play for deals than you did in 2009 and 2010. And most interestingly, if you are like most of the equity firms that are active in the market, you are looking for smaller deals. As we have discussed before, equity firms find the middle market really attractive. According to , during the first quarter of 2011, more than 40% of the deals closed by equity firms were valued below $50 million and nearly 80% were below $250 million.
Percent of Private Equity Transactions (Count) By Deal Size (Through First Quarter, 2011)
Source: PitchBook (through first quarter, 2011)
According to a number of sources, the popularity of smaller companies has continued to grow among private equity players. In fact, many in the industry now consider the mega-billion dollar deals to be the exception, not the rule, as they were during the last M&A boom in 2006 and 2007. As you’ll recall, at that time credit was flowing freely and high levels of leverage were the standard on these mega-deals. Now the rules have all changed, and equity firms are focusing on smaller companies as the “new normal.” This is how the situation was described in a recent article in Reuters:
“‘It’s a bridge too far,’ said David Roux, co-founder of U.S. private equity fund Silver Lake earlier in June, when asked if there could be a $15 billion buyout in the technology sector. ‘It stretches the debt capacity and stretches the equity capacity and it’s an unnecessary risk at a time when there are plenty of other good things to do,’ said Roux.”
Note the statement I have emphasized above. Mr. Roux really sums it up nicely. From an equity firm’s perspective, it is much safer in today’s market to hit a bunch of singles rather than swing for the fences and risk a billion-dollar acquisition. Equity firms have rediscovered that thetypically provides a safer, longer-term return. And, from an operational standpoint, in most cases it is simply easier to manage a portfolio of smaller companies than it is to try and digest a billion-dollar deal successfully.
It’s a Seller’s Market
This is good news if you are the owner of a we are entering a seller’s market. Never before have we seen so much cash in play chasing so few good deals. With an estimated $1.9 trillion on corporate balance sheets and nearly $500 billion sitting on the sidelines with equity firms, the next 12 to 24 months could provide middle-market business owners with the best opportunity in decades to find an optimal buyer and close a deal. Again, as Reuters stated:. But the really good news is that
“Private equity firms have been finding themselves outbid by cash-rich strategics – meaning buyers competing in the same sector as the target. Corporate buyers, who were hoarding cash throughout the crisis, have returned to the market, providing stiff competition for private equity firms that were mainly competing among themselves for deals last year.”
If you are contemplating the sale of your company in the near future, you need to establish a relationship with an M&A intermediary sooner rather than later. Since it typically takes 12 to 18 months to close most deals (assuming your company is already “buyer ready”), the longer you wait, the chances increase that buyers will become less active as this cash is invested in the market – and that might mean invested in other sellers in your industry as well. So I highly encourage middle-market business owners that I encounter to at least begin the process of meeting with M&A advisors to discuss how to prepare their companies for buyers’ scrutiny.
If you are like most middle-market business owners, your entire net worth is tied up in two assets: your home and your business. Eventually you will need to liquefy your assets and diversify. The longer you delay, the more you risk not only losing out on a seller’s market, you also run the risk of being forced to sell when external circumstances compel you to. Don’t become a victim of that.
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