As we have indicated before, M&A activity has made quite a comeback so far in 2011. With strategic players flush with cash and credit flowing, it is not surprising that deals are once again resurging.
In fact according to Dealogic, spending on M&A increased nearly 33% in the first quarter of 2011 over the prior year, reaching $608 billion. And most of that activity was driven by strategic acquirers.
Based on a recent survey of corporate strategics, it appears that these trends will continue through 2011. To gauge future growth, The Deal LLC and Merrill Data Site surveyed nearly 100 of the leading corporate dealmakers in the US. According to this group, more than half expect to make more in 2011 than they did in 2010:
The preceding pie chart clearly indicates the enthusiasm that corporate dealmakers have for the rest of this year. Not only do 54% expect to do more deals only 4% expect to do less! According to Patrick Ramsey, co-head of Americas M&A at Bank of America Merrill Lynch:
“The desire is strong and the means exist for bold strategic action. There’s been continued restoration of confidence at the CEO and board level, balance sheets in many cases are underleveraged, debt financing is available at historically low costs, and the equity market is generally applauding strategic acquisitions.”
Mr. Patrick makes an excellent point that most middle-market business owners are not taking into consideration. The cost of debt to make acquisitions is lower now than ever before. Interest rates will eventually rise and could potentially rise dramatically. There is an inverse relationship between interest rates and business valuations. The lower the rates, the higher the valuations (assuming other risk factors do not impact the valuation). So as rates rise over the next five years, valuations will drop, impacting both how much you will receive for your company and your deal structure.
Middle-Market is a Prime Target
So what are these corporate dealmakers looking for? Despite the press coverage which focuses on billion-dollar, mega deals, these decision makers are focusing on the middle-market. When asked how much their companies will be spending on deals for the remainder of 2011, the largest portion indicated middle-market sized deals:
As shown, a significant portion, nearly half, will be spending under $249 million for the rest of the year on acquisitions. Assuming that this group closes one deal a month for the rest of the year, that would equate to an average of about $40 million per deal. Not exactly the mega deal!
As we have discussed before, there are quite a few corporate strategics that are “serial acquirers”, buying 20 or more deals annually year after year. Quite a few middle-market business owners that I meet are really surprised to learn this. And given that the middle-market is the primary target of these acquirers, it is vital that you position your company to be as attractive as possible to these professional buyers.
Making your company a buyer ready business is vital; and obtaining the services of an experience M&A advisory firm is critical to help you do so.
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