Larger Players Squeeze Mid Market PE Firms

As reported in the Wall Street Journal, it is a difficult time to be a mid-market private-equity firm. Larger competitors, a seller's market and high valuations are combining to create a difficult atmosphere for smaller firms. “We have been getting blown out of the water on bids. Everything is going to auction, that wasn’t the case 10, even five years ago.” said Stratton Heath, partner at Oak Hill Capital Partners, this past Friday. Traditionally, PE firms could come in and make a bid that was persuasive enough for a company to not need to consider an auction process, but sellers are becoming more and more selective.  This also could lead to buyer's remorse; if you're paying top dollar to win a bidding war for a middle market firm, you'd better be right. Read the entire article here.

Blackrock: Political Polarization Creating Lack of Consumer Confidence

Pretty regularly here at the CC Capital Advisors blog, we ask the question: "Why have the markets failed to rebound as fundamentals improve, equity markets rally and an abundance of capital sits idle in a low income environment?" As we wrote previously, healthcare had a tough time in 2013 due to the Affordable Care Act casting a shadow of uncertainty over the market. Russ Koesterich, Chief Investment Strategist at Blackrock recently released a paper that postulates that political uncertainty extends beyond healthcare to tax code, regulatory issues and more. Russ explains that the budget deal has removed the risk of another government shutdown, but continued uncertainty about the ACA and partisan gridlock are making consumers and businesses alike uneasy. According to the figure below, party polarization is at its worst point in fifty years. This graph measures the difference in voting patterns between the Democrat and Republican members of Congress. As you can see, the gap is widening, not narrowing.   So, what does this mean for the wider deal market? First, the uncertainty of the political situation is most likely impacting more than just the health care industry. When a government is unable to govern properly, there is a resulting lack of confidence in that market. This is generally seen in emerging markets, where a sovereign government may make investment difficult or risky, but can also take place in developed countries. Secondly, it will be interesting to see just how good the fundamentals and market opportunities need to be to overcome this lack of faith in the political system. At some point, one would expect deal makers to take advantage of opportunities even if they lack faith in the broader political situation; this will only happen when the reward outweighs the associated risk. Finally, Russ concludes that if there are any sort of "surprises" of the positive sort from Washington, we could see pent up deal demand released into the market place. Of course, that would require a miracle in the form of Congress getting their act together. Read the entire report from Blackrock here.

Actavis to Acquire Forest Laboratories for $25 Billion

Today, Actavis announced that they have entered into a definitive agreement to acquire Forest Laboratories. Forest is based in New York, NY, but has Midwest operations in Earth City, MO. The purchase price of $25 billion represents a 25% premium over Forest's stock price. The merger is expected to generate double digit accretion in 2015 and 2016, with approximately $1 billion in synergies to be realized within the first three years. If successfully completed, the merger would combine a generic juggernaut in Actavis with a leading name brand producer in Forest. If the transaction closes, the combined entity would have projected revenues of more than $15 billion in 2015, with strong free cash flows in excess of $4 billion. As 2014 rolls on, several interesting deals are coming to light. The Actavis-Forest merger announcement comes on the heels of a potential business combination of Comcast and Time Warner, which is estimated at ~$45 billion in value. Hopefully, these large deals will spur the lower middle and middle markets to follow suit, although the glut of megadeals in 2013 did not seem to have that impact. Read the full press release from Actavis here.

Merge or Die: Are Mergers the New Growth Catalyst in a Sluggish Economy?

As 2014 begins to take shape, many in the M&A industry are worried about a repeat of 2013, when conditions seemed ripe for deal making but those deals failed to execute.  Other than several mega deals, 2013 was largely disappointing. For context, world wide M&A was $4.27 trillion in 2007 on more than 40,000 transactions. Only a year later, 2008, we saw that amount fall to $1.9 trillion. Reuters estimates that private equity firms ended 2013 with $1.074 trillion in dry powder. Bain Capital has postulated that there is $300 trillion in capital laying dormant around the world that could be used for M&A. Capital is also still cheap, as interest rates remain relatively low. So, with all of these things pointing towards more deals being executed, when will it begin? In a recent article from Institutional Investor, Robert Teitelman postulates that there could be a "new normal" in terms of how companies grow. In a low growth global environment, he says, acquisitions are one of the only ways to increase the size of your business. US GDP was a healthy 3.2% in Q4 2013 after being 4.1% in Q3, but other parts of the world are not showing that same growth. Most expected M&A activity to be back to pre-crisis levels by now, considering the health of the overall stock market and US economy. However, it has only rebounded to mid 2000s levels. Chris Ruggeri is a principal in Deloitte’s financial advisory unit and leading manager of the firm’s M&A practice. She summed up the lack of deals by saying, “We’ve been sort of stuck. Confidence fuels growth. And growth fuels M&A. To get growth, you need confidence. It’s not there.”  Let's hope the confidence returns and deal makers start pulling the trigger, or 2014 could be a repeat of 2013.

VC Valuation and Trends: Seed Series Rise, Most Other Rounds Fall

November 6, 2013 10:19 by Clayton Reeves in   //  Tags: , , , , , , , , , ,   //   Comments (0)
As reported by Pitchbook, the median pre-money valuation financings in 3Q 2013 fell across the board. The exceptions were Series Seed and Series C, both of which increased to new record highs. Valuatons have been trending higher for the last several years, but it had historically been most pronounced in later stage rounds (Series D or later). However, as we discussed several weeks ago, seed valuations are now skyrocketing, as well as Series C. As you can see above, the deal volume and capital invested has been relatively stable since mid-2012 after a volatile period from 2011 through first half of 2012. Read the entire report here.

Q2 2013 Private Equity Industry Trends

August 13, 2013 12:17 by Clayton Reeves in Capital Markets, Healthcare, M&A, Private Equity  //  Tags: , , ,   //   Comments (0)
McGladrey and PitchBook have reported private equity activity broken down into four sectors: business products & services, consumer products, health care and information technology. B2B: This industry continued to slow down in Q2 2013, with only 95 PE deals completed, totaling $11.0 billion. To put this into perspective, these are some of the lowest numbers in the last decade. Consumer Products: Continuing the trend from B2B, consumer products also slowed to the pace of frozen molasses, with PE completing just 64 deals during Q2.  Again, for perspective, this is the lowest quarterly total in more than a decade. Like other parts of the M&A market, the dollar amount ($31.2 billion) doesn't look too bad until you take out the megadeal for Heinz ($23.2 billion). Health Care: In an industry that has been expected to provide high deal flow, health care failed to live up to the hype.  PE managed only $4.1 billion of investment across 37 transactions. This proved to be the slowest quarter for deal flow since Q3 2009. Information Technology: Breaking the negative trend in PE activity, IT saw an increase in deals from Q1. Private equity invested $12.5 billion across 65 deals in Q2, which is similar to quarterly activity for the last couple years. So, what do these trends indicate for the broader M&A market?  It means that while PE still has considerable dry powder, this remains a seller's market.  Quality companies with earnings growth are hard to find, and when they decide to sell they are able to demand a high multiple.  So far, buyers have been patient, but eventually someone will have to flinch.  Either sellers will need to lower price expectations, or buyers will need to increase their price expectations for high quality targets.  If this doesn't happen, expect continued sluggishness. Click here to read the industry reports.

Are Mega Deals Paving the Way for the Middle Market?

August 8, 2013 12:35 by Clayton Reeves in Capital Markets, M&A  //  Tags: , , ,   //   Comments (0)
Last week we wrote an article about a slew of deals announced in a 24 hour period.  We wondered if this may be a good sign for the rest of the market as a whole, in terms of increased deal volume in the future.  The Washington Post agrees with this sentiment, saying that the increase in mega mergers is a reflection of growing confidence in the economy.  As we said, the number of deals is down YoY compared to 2012, but the dollar amounts have increased.  Deals in dollar terms for 2013 have grown to $607 billion, compared to $486 billion during the same period in 2012.  This seemingly good news conflicts with some negative news around corporate margin widening slowing down, which would seemingly indicate at least a lull in growth for the future.  Of course, cheap corporate loans and the availability of dry powder for many companies and private equity firms means there are still plenty of willing buyers to be had, no matter what corporate margins are doing. In the end, deals create more deals.  The larger market players seem to be realizing that all this cash sitting around isn't earning them much of a return, and are acting towards putting it to good use.  The middle market might be the next area that we see deal volume pick up in. Click here to read the entire article.

Merger Monday: $50 Billion in Deals Announced in 24 Hour Period

July 29, 2013 17:17 by Clayton Reeves in Capital Markets, Financing, M&A  //  Tags: , , ,   //   Comments (0)
For those who slept through the last 24 day, boy has it been a busy time! As reported by USA Today, there were nearly ~$50 billion in deals announced over the past 24 hours - The fashion chain Saks was acquired by Canadian retail giant Hudson's Bay in a deal valued at $2.9 billion - U.S. drug maker Perrigo bought the biotech firm Elan in an $8.6 billion deal. - Allbritton TV stations were purchased by broadcaster Sinclair in deal valued at almost $1 billion. - Michael Baker has decided to sell itself for $392 million, $40.50 a share, to IMS, a privately held provider of professional, engineering and other services. This represents a 37% premium on Friday's closing price. - In a deal that would create the world's largest ad agency, firms Omnicom and Publicis plan to merge. This deal would be valued at $35 billion. - Republic Airways may also have found a buyer for Frontier Airlines (still in a preliminary, non-binding state) What does this mean for deal making in general? Many are pointing to these deals as a sign that equity values are not all that overpriced after all. As Richard Peterson of S&P Capital IQ states in the article, deal proceeds are up from last year. However, the proceeds figures had been skewed by some large transactions, while number of deals was down. If these large deals continue to happen, it may give confidence to the middle market to pursue more deals. Click here to read the entire article.

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