Dealmakers see a bottom

A panel of US middle-market participants agreed today that while the current economy is bleak, signs of stability have appeared, paving the way for a renewal of M&A activity.

The economy is in the dumps but seems to have moved beyond the free-fall of the fourth quarter, which portends a renewal of deal activity for private equity players, agreed a panel of US middle market participants at the ACG InterGrowth event in Las Vegas today.

Debt trading activity indicates what while market participants believe default rates may yet rise, there won’t be a “dramatic downswing” as seen in the fourth quarter of last year, said Lawrence Golub, founder of middle-market lender Golub Capital.

“Fear has receded,” said Mike Moran, co-founder of private equity firm Brockway Moran & Partners, who noted that consumer spending statistics indicate that “we appear to be bumping along the bottom”.

The comments jibed with the general sentiment of the InterGrowth event, a major annual gathering of nearly 2,000 dealmakers. According to a survey of members of the Association for Corporate Growth, which hosts the event, 56 percent of dealmakers believe that mergers and acquisitions activity, now dormant, will increase over the next six months. Only 10 percent believe that deal volume will fall further.

Anybody who passed on a deal in [recessionary] 2002 because they didn’t want to pay 5 or 10 percent more is probably kicking themselves.

Lawrence Golub

Jack Helms, chairman of the middle market practice of investment bank Lazard, said that a small but noticeable return of the public equity markets will be a key that unlocks a significant amount of deal activity. Private equity firms in particular own many portfolio companies that they want to sell once pricing multiples increase slightly. “There will be a ton of sales,” Helms said. “It will happen as soon as there’s a little breeze” in the market, possibly a year from now.

Purchase price multiples are lower now than they have been in 13 years, according to statistics from Mergerstat shown to the audience. Year-to-date purchase price multiples for 2009 are 6.3 times EBITDA, a sharp drop from the 8.8x average of 2008, and even lower than the 6.8x average of recession-addled 2002.
Mark Aronson of PCE Investment Bankers described a market with confident sellers who are holding out for better prices. “There are people who won’t take 6.5 [times earnings] instead of 7 for a business that has performed,” he said.

The panelists expressed frustration that buyers and sellers weren’t more eager to close deals in the current market, arguing that small differences in price ultimately wouldn’t make material differences in the performance of deals. “Anybody who passed on a deal in [recessionary] 2002 because they didn’t want to pay 5 or 10 percent more is probably kicking themselves,” said Golub.