Great Insights as these are a wonderful example of the information covered at the conference!
On the sell side: Private equity funds seek to maximize long-held portfolio investments. Corporations have an unprecedented war chest for strategic and value acquisitions. On the buy side: PE funds have dry powder to put to work, and sellers have adjusted valuation expectations. Banks are out of intensive care—credit is once again available and on reasonable terms. These factors will create an environment favoring significant M&A activity in 2011. Here are 10 important trends shaping the landscape.
1. The Turning Tide of M&A for Strategics: Acquisitions for Growth v. Retrenchment.
Companies have been hoarding cash for two years. Inflation is on the horizon, and the value of cash will decline. A blinding flash of the obvious? Perhaps—but also a harbinger of change. Companies understand that it may be time to convert their cash into higher-value assets. With the economy turning around, companies are spending on acquisitions designed to move their businesses forward, rather than protecting them against the woes of a bad economy— using acquisitions both for top-line growth and to expand into new areas.
2. Social Networks—New Platforms Are the X-Factor.
A plethora of social networks is “out there” with varying reports of profitability. Some are rumored to be ready for IPO, and others are one step away from extinction. One thing is clear—size really does matter and those who have it will succeed. With declining prices for apps, access and games, the number of customers looking at ads and making purchases must increase. The social networks and other online behemoths are becoming aggressive acquisitors in this area to expand both their customer base and the number of devices each customer accesses. Ubiquity across platforms (think moving seamlessly from desktop to smart phone to tablet to automobile) will leave no revenue stone unturned. Look for acquisitions that will assist these networks in making the transition.
3. In Media, Revenue Starts with the User: Making Your Internet Experience New and Wow. Daily. Hourly. By the Minute, er Second...
In order to keep the user online and in a particular company’s universe, offerings and content must continue to wow. In this market, setting a trend, and competing as quickly as possible once one has been set, is critical. There is no time to build, and companies will buy both to compete and to stay on top. Given the number of talented, gung-ho developers, acquiring it first may now be as important as developing it first. Exclusive access to the hottest trends drives network participation, while a continuous feed of new offerings, content and products keeps customers glued to a particular network. Media company executives constantly scour the Internet for new purchases that put their users in front of electronic devices. Stay tuned for acquisitions that reinvent some of the traditional players as well.
4. Is the PE Roll-up Back? New Platforms Created by Financial Buyers.
Technology, energy, biotech, healthcare, education—areas in which we expect to see a significant increase in M&A activity. Now back in the game, PE funds will give some strategic buyers a run for their money. The PE-backed, platform building structure enables firms to deploy large amounts of capital by transacting multiple deals in the middle market where prices represent a better value and business owners are motivated. The PE funds then expect that the new company will be able to achieve higher operational multiples.
5. Middle Market? Everyone’s Doing It!
Giant deals don’t always make money. In fact, some would say that macroeconomic fears and market volatility often outweigh the possible upside to a cross-border mega deal. Combine that with the fact that the operations of a bureaucratic, multinational corporation are costly and complex, and changes fueled by acquisition do not always drive profits. In contrast, PE involvement with a middle market company can have direct, immediate impact on the company and its operations, potentially increasing strategic value to a corporate buyer and exit multiples to the fund.
6. Leveraged Buyouts? Hiding but not Dead.
Banks have to lend money to make money. PE funds must deploy cash to generate a return. Reportedly with $400 billion in cash, PE funds must either deploy or give back. It is unlikely that the super mega-buyouts and high leverage ratios of 2006 to 2008 will be back anytime soon. However, acquisitions that require significant PE backing also require large loans to complete the purchase, a more likely scenario in 2011. Throw in some mezzanine financing and we’re back in 1998—the return of the larger deal.
7. Hey La, Hey La, the Earnout’s Back!
Today, where more equity is required, less leverage is available and valuations are increasing, the earnout has made a roaring comeback. Some buyers consider the earnout a good way to ensure the value of their purchase, while some sellers consider it simply a form of seller financing. Whatever your perspective, earnouts are fraught with all kinds of legal and business issues and must be carefully negotiated.
8. The Role of Real Estate Acquisitions in 2011 M&A.
Real Estate. Really? We think so. The sector may not be roaring back, but M&A activity will be strong for many reasons. Debt is becoming available, balloons are coming due and valuations are still low. Real estate firms will likely seek to take share in existing markets, divest non-core assets and seek out transformational deals.
9. Why Did the Company Cross the Border?
To get to the markets on the other side. These days, most companies have some international component, whether it’s customers, manufacturing, sourcing or sales. Hence, the majority of acquisitions will have cross-border implications. Traditionally, cross-border deals include buyers and sellers in different countries (which still happens with some regularity, typically where a conglomerate is the acquirer). We also expect to see the regulatory schemes of other countries playing a large role, both operationally and in how the transactions are structured.
10. Something Normal All Fouled Up: The Effect of Geopolitics
M&A markets love stability, typically without regard to politics—unless a particular regime causes economic instability for buyers or sellers, or risk that is too, well, risky. For example, before the riots and resulting political maneuvering, Egypt was the next, hot PE market. While in the long run, most believe that the change is good, political upheaval will likely have a negative effect near-term on completion of deals involving Egypt and the Middle East.
See orignial article:
http://www.acg.org/UserFiles/file/global/enewsletters/Corporate%20Call/April%202011/Duane%20Morris%20Article%20Ten%20Trends%20M&A%202011.pdf
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