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.

December 13th, 2013: Recent Bank & Thrift M&A Market

December 17, 2013 12:56 by Clayton Reeves in Banking, M&A  //  Tags: , , , , ,   //   Comments (0)
Click here to download the weekly report. CC Capital Advisors, a Kansas City-based investment banking group, provides a variety of advisory services to financial institutions including buyside and sellside mergers and acquisitions, branch acquisitions and divestitures, capital and strategic planning. CC Capital Advisors stands ready to deliver the expert advice you need with the personal attention and integrity you deserve. For more information, contact Shelley Reed, Managing Director, at (816) 968-1511 or sreed@cccapitaladvisors.com.

Justice Department Clears Merger of AA and US Airways

November 14, 2013 09:57 by Clayton Reeves in Capital Markets, M&A, Regulation  //  Tags: , , , , ,   //   Comments (0)
As reported in Deal Book, the Justice Department has cleared the $11 billion merger of American Airlines and US Airways. This paves the path towards creating the world's largest airline. The merger comes at the end of a tough period for airlines, which has seen high fuel prices, bankruptcies and labor issues. This is a new step in the industry's deregulation, and leaves only a few airlines that control the bulk of domestic and international flights. The remaining giants are American, Delta, United and United States domestic flight behemoth Southwest. The Justice Department claims that this merger will foster competition among market operators, but not everyone agrees. Transportation economics professor George Hoffer, from the University of Richmond, stated that the merger effectively removed one competitor from the market. He added that this could result in fare increases in many markets and fewer flights.  Investors, on the other hand, were obviously in favor of the deal, which creates a more formidable airline in the combined entity. All airline stocks were higher Tuesday, indicating that the market may agree with Dr. Hoffer on who wins from this deal. Read the full article here.

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.

Increasing Seed Valuations Making Series A Rounds Difficult

October 18, 2013 08:55 by Clayton Reeves in Capital Markets, Economy, Financing, M&A, Private Equity, Venture Capital  //  Tags: ,   //   Comments (0)
As reported by Pitchbook, seed valuations have increased 62.5% from 2009 through the first three quarters of 2013 for a cumulative annual growth rate of 13.8%. Meanwhile, Series A valuations are increasing, but at a slower rate, from $6.8 million in 2009 to $8.9 million. This 30.8% growth represents an annualized rate of 10.3%. Inflated seed-stage valuations may be having an effect on a startup's ability to raise funding in the Series A round, as seed investors want to see appreciation in their investment, while Series A investors believe the seed valuation was too high. Source: Pitchbook As seed-stage investments increase, companies are finding it more difficult to raise Series A financing.  This is at least partly due to a shift in VC investment philosophy, which has seen the share of seed-stage investments grow as a proportion of total VC investments over the last three years.  VC firms are trying to pick out winners earlier, and get them for a reasonable price.  The competitive bidding, however, is causing those valuations to increase.  It will be interesting to see how this plays out over the next several years, and if the Series A crunch will continue. Read the entire article 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.

Women Venture Capitalists: Taking a Bigger Piece of the Pie

Women's positions, or lack thereof, in powerful financial roles is often a contentious topic. However, in terms of venture capital, it seems that there is a trend towards more involvement from the fairer sex. According to Pitchbook, companies with at least one female founder have been increasing their share of venture rounds every year for the last 10 years. This trend is material; 10 years ago, women-founded companies represented a meager 4% of all venture deals in the United States, but in 2013 we have seen that number rise to 13%. Source: PItchbook Men continue to dominate the arena, but the trend is positive. Women own 28.2% of all businesses in the US, according to The Center for Women’s Business Research. So, the venture percentage is still not as high as it should be, in order to be proportionate to gender based ownership. However, in certain sectors, women are dominant. Through the first half of 2013, women-founded companies comprised 40% of venture deals in the retail space and 33% in the consumer services space.  Both of these figures represent high water marks for the space. Hopefully these figures will continue to increase, as diversity is always a catalyst for innovation and new perspectives. Read the entire article here.

BATS and Direct Edge to Merge

August 26, 2013 09:46 by Clayton Reeves in M&A  //  Tags: , , , ,   //   Comments (0)
Local Kansas City stock exchange BATS Global Markets, Inc. (BATS) and Direct Edge Holdings LLC (Direct Edge) have announced a definitive merger agreement today that will bring the two exchange operators together in an effort to displace NYSE and Nasdaq as the market leaders.  BATS came on the scene relatively recently (in terms of stock exchanges), leveraging advanced technologies and speed of operation to steal market share from the larger, slower market leaders. Given the recent technology related blips on major markets, the merger couldn't come at a better time for companies looking to improve reliability and integrity in electronic trading.  Current BATS CEO Joe Ratterman, who will remain in the same role for the combined entity, said, “This agreement is an important milestone for the U.S. equities market and other markets around the globe as it will combine two organizations that have been innovative in creating a more competitive marketplace to benefit all investors.” Direct Edge CEO William O’Brien, who will be President of the new company, said, “Direct Edge and BATS were both founded on a commitment to create an optimal trading experience for a diverse member base, from retail investors to broker-dealers to institutions. Together, the best of both organizations will work to further improve how the world trades, consumes market data, and accesses capital markets.” The combined company will remain headquartered in Kansas City, with additional offices in New Jersey, New York and London. Click here to read the press release.

Q2 Deal Multiples Update

August 21, 2013 10:45 by Clayton Reeves in Capital Markets, Economy, M&A  //  Tags: , , , , ,   //   Comments (0)
The market was widely unchanged from Q1 to Q2 2013.  Multiples remained comparable to the quarter prior, and there remained a significant premium in play for larger companies. - The median EBITDA multiple for all deals was 6.07x.- The median revenue multiple for all deals was 1.06x.- The median debt percentage for all deals was 57%.- The average time to close a deal was 15 weeks. One of the most interesting factors was the push away from only companies with topline growth; in the most recent quarter,  33% of the acquired companies saw flat or shrinking revenue in the year prior to acquisition, while respondents anticipate that 90% of the companies acquired in 2Q will see heightened revenue in the year ahead.  Last quarter, very few companies would invest in a company without topline growth.  It looks like the competition between buyers may be forcing the hand of some participants to go outside their normal constraints. Click here to read the report from Pitchbook.

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