Not so clean exits

The M&A market was not kind to sellers last year. James Harris finds out whether conditions are likely to improve in 2010.

The M&A market was not kind to sellers last year. James Harris finds out whether conditions are likely to improve in 2010.

The M&A market was not kind to sellers last year. James Harris finds out if conditions are likely to improve in 2010.

While the M&A market suffered in 2009, there are more reasons to be optimistic over the next 12 months as EBITDA multiples are climbing upwards and vendors are becoming more realistic about pricing.

Here two advisers share their thoughts on the M&A market in 2010:

Alex White, Partner, BDO

There are a lot of businesses that are deferring sales because they are concerned about valuations. That could be a mistake. Pricing at the moment may be higher than in 12 months’ time.

At the moment, there’s more demand than supply. There are a lot of private equity investors that are anxious to invest in 2010. Investor activity is so low at the moment that three or four years down the road, private equity firms won’t have any portfolio companies to sell, and that is their business model. Therefore the deals that are coming to market are getting a lot of attention. Pricing is better than people think.

We’ve been through the worst part, but the halo effect of survival gives way to the grind of the recovery, and with higher economic growth comes higher taxes and spending cuts. We haven’t had the fiscal tightening, but it will come at the end of 2010.

It is inevitable that the capital gains tax (CGT) will increase, and last time they increased the CGT, it drove M&A activity. Selling early and avoiding that tax increase might be a good tactic.

Paddy MccGwire, Founding Partner, Cobalt Corporate Finance

The technology sector is fairly robust. There are a lot of small entities that are attracting interest and are being acquired by companies with market clout. Also, technology companies tend to have highly scalable businesses. By delivering software online, companies provide products which are easy to access and cheap to maintain. It’s easy to upgrade services and it’s easy to get them to market. A restaurant chain on the other hand is capital-intensive to scale out.

Deal structures depend on confidence in the forecast, the strategic value of the acquired business and whether it will be integrated. If there is confidence in the balance sheet and the company will be run as a stand-alone business, the vendor can get a sensible amount up front and an attractive earn-out.

However if the business is fully integrated into the acquiring company, it is more difficult to get an earn-out. The acquired company won’t be ring-fenced so it’s harder to measure its success. In those circumstances, the emphasis is on being paid up front, so in order to maximise value you need to have high visibility in your forecast and a strong and sustainable growth record.

At the moment private equity buyers don’t have access to debt and are focusing on the price of businesses, which is why trade buyers are in a position to outbid private equity rivals. If a business is strategically important to a trade buyer, it will attract a good price.

Nick Britton

Nick Britton

Nick was the Managing Editor for when it was owned by Vitesse Media, before moving on to become Head of Investment Group and Editor at What Investment and thence to Head of Intermediary...

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