Tech M&A Rises to 2000 Levels

As reported in the NYTimes DealBook, merger mania that gripped the world during the dot com bubble seems to be making a comeback. Fueled by Facebook's two big acquisitions, the dollar volume of tech deals is up 90 percent worldwide, to $65.2 billion, year over year, according to Thomson Reuters data. This is the highest it has been since the year 2000.  The ten biggest tech deals of the year all involve acquisitions of American companies, the biggest of which has been the purchase of WhatsApp for $19 billion. The WhatsApp acquisition is the fifth largest tech deal ever, according to Thomson Reuters. Technology is hot right now, and looks to be picking up steam. We've received more inquiries from technology companies this year than we typically do. Not everyone is excited about the tech boom, however. Castlight recently went public in an offering that defied traditional valuation metrics; the company's valuation soared to more than $3 billion on 2013 revenues of only $13 million. Yahoo! finance called it the worst IPO of the century. So, where does this leave the rest of the market? As with any bubble, everything is rosey until something pops. With the momentum tech has built so far this year, it wouldn't surprise us to see more large deals over the next 9 months of the year. However, if valuations continue to defy historical measurements and reality checks, watch out - the last time companies without profits were going public at incredible multiples (dot com bubble), the market correction was harsh and swift. Read the original article from NY Times DealBook here.

E-commerce Competition Intensifies: Megadeal between Google and eBay on the Horizon?

As reported by the San Jose Mercury News, Carl Icahn is at it again. One of the world's most active investors, Icahn is pressuring eBay to spin off its PayPal segment in a move that is intended to unlock value for current eBay shareholders. However, one analyst from Baird Equity Research seems to have a different idea, which he revealed in an investment note released on Monday. Baird analyst Colin Sebastian recently wrote that a merger could be "a possible 'best of both worlds' opportunity" that would accomplish Icahn's goals while allowing Google to shore up a struggling division. He continued to explain that, "we believe acquiring eBay/PayPal would be one way for Google to secure quickly a strong leadership position in commerce and payments, and likewise, could represent a better strategic option than alternatives proposed for eBay," The deal would certainly create a giant in the e-commerce space, with eBay potentially adding $75 billion to Google's already mammoth $400+ billion capitalization. Read the entire article here.

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.

2013 PE Deal Flow Review

February 13, 2014 11:32 by Clayton Reeves in   //  Tags: , , , , , , ,   //   Comments (0)
McGladrey recently released reports on PE activity in four sectors: business products & services, healthcare, information technology and consumer products. Business Products & Services: The first half of 2013 represented one of the worst periods of the last several years for B2B deal making. The first two quarters suffered a hangover effect from the rush to close deals at the end of 2012, and took the first six months of 2013 to recover. While Q3 and Q4 were better, they couldn't make up for the lack of performance over the first half of the year. This is surprising, as 2012 had the most PE exits in B2B in the last ten years. Many expected those exits to spur additional investments, but instead PE mostly sat on their cash. 2014 is expected to be better. Healthcare: Once a rock in an uncertain sea of M&A, not even healthcare could escape unscathed from 2013. Deal flow in the healthcare industry contracted for the first time in 2013 since 2009. Although the number of deals consummated was still historically high at 280, capital invested declined for the second straight year. Industry experts blame a variety of factors on the hesitation to invest in healthcare, foremost amongst those reasons being the affordable care act. Once there is more certainty around the evolving regulations, investors are expected to have more confidence in evaluating acquisitions. Information Technology: PE deal makers broke a streak of three straight years of increased deal making in IT, but capital invested soared 55% to $86.5 billion. IT companies continue to perform well as technology continues to make its presence known in professional and personal applications. McGladrey expects 2014 to be slightly better. Consumer Products: M&A in the B2C industry followed general industry trends, declining 14 percent from 2012 to 2013. Capital invested was the highest it has been since 2008, but consumer products companies continue to struggle as confidence continues to improve gradually. Q4 was difficult for consumer products companies, as holiday sales increased revenues at the expense of margins. McGladrey believes the pipeline is stocked with deals compared to the same time last year, since Q4 2013 did not see the same rush to close as Q4 2012 did. Access the full reports 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.

KPMG: Deal Activity in 2014 Expected to Improve

KPMG recently released the results of a survey given to over 1,000 deal makers with regards to 2014 M&A prospects. In short, deal activity is expected to improve in 2014. However, 2013 was also heralded by many as the year that would see M&A really take off and it didn't quite come to fruition.  Several mega-deals notwithstanding, 2013 fell short of expectations. So what makes 2014 different?   According to the survey, deal makers felt relatively positive about the environment and 63% of respondents said they planned to be acquirers in 2014. Most of this optimism was the result of large cash reserves, favorable/available credit terms, improving equity markets and improved overall confidence. However, as one investment banker put it, deals should most likely increase "because next year can't possibly be as bad as this year." This is where the questions really start. Many of the economic drivers present at the beginning of 2014 were also present in 2013. Private equity has piles of dry powder, corporate balance sheets are stocked with cash and money is cheap to borrow. However, all of these factors were also present in 2013. Instead of an increase in overall activity, we saw an increase in PE exits. So why would activity suddenly increase? According to the results below, most respondents expected targets to "become available." From our experience in the market, there are plenty of motivated buyers, but quality companies wanting to sell have been scarce. If this situation changes in 2014, the activity will most likely be very high. Some companies that we've spoken to have been anxious to eclipse pre-recession levels before having a liquidity event. Others are optimistic about the market in general, and want to leverage their growth opportunities utilizing cheap borrowed capital. The latter of those reasons won't change in 2014, but if some companies reach their targeted EBITDA numbers, sales could increase.   Click here to read the full report from KPMG. Hopefully, the conclusions drawn from their survey will come to fruition and 2014 will be a "solid" year.

Pitchbook PE Deal Multiples Show Deal Multiples for Small Deals Falling

November 14, 2013 09:47 by Clayton Reeves in Capital Markets, Financing, M&A, Private Equity  //  Tags: , , , , , ,   //   Comments (0)
As reported by Pitchbook, PE transaction multiples were reasonably steady in Q3 2013. However, deal size showed significant changes. For example, median enterprise value (EV) for small deals (EBITDA<$25 million) fell from 5.0x in Q2 to 2.5x in Q3. On the flip side, EV/EBITDA multiples rose to 10.7x for transactions of $250 million or more, while revenue multiples fell to 1.7x, the lowest in over two years. So, what does this mean for the market? It means PE firms (and the market in general) continue to pay for profitability over pure sales. Market participants definitely want revenue growth, but they also want healthy margins and solid business models. Since companies with both are rare, PE firms continue to pay a premium on larger transactions. There is generally still no rush towards companies that show revenues, but lack profits, unless the growth story is compelling (i.e., Twitter).  Key statistics from 3Q 2013 explored in this report include: Median EBITDA multiple:6.81x Median debt percentage: 50% Average time to close a deal: 13 weeks Read the full report here.

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.

A Busy Week in M&A!

As reported by Daily Finance, deal-makers have wrapped up three multi-billion dollar acquisitions so far this week as the markets get a late start thanks to Labor Day. This week has proven to be a busy one in terms of billion+ acquisitions, as three have been wrapped up already. Microsoft, Verizon and lesser known Jarden (consumer products) all completed deals with price tags over the billion dollar mark. Microsoft agreed to purchase Nokia's cellphone business for $7.2 billion in a move that has been anticipated by many. Controlling the business allows MSFT to make a more unified and coordinated challenge to Apple, Google and Samsung in the mobile market. This will allow the company to leverage their Windows platform, which has already gained more traction in mobile than many expected (although the desktop version has left much to be desired). Additionally relevant, and perhaps less obvious, is what impact the move will have on Microsoft's executive team moving forward. MSFT has "acquired" Nokia's CEO, Stephen Elop in the deal; Elop is a proven leader and will automatically be the top contender to succeed Steve Ballmer. Verizon's deal was more of a self purchase, as it completed the purchase of 45 percent of Verizon Wireless held by British Telecom giant Vodaphone. At a price of $130 billion, the cost was steep. However, this gives Verizon Communications full control of the company and its 100 million subscribers. Finally, in a deal that smells incredible, Jarden purchased privately held scent seller Yankee Candle, best known for its candles. That deal is valued at almost $1.8 billion. What does this mean for the wider market? It is difficult to tell. September is usually a bad month for stock markets, which could make M&A deal makers skittish. However, mega-deals of this nature are a good sign that activity in the second half may pick up as predicted. Read the entire article here.

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