M&A Review - January - June 2009
Livingstone Madrid Partner, Neil Collen looks at the turmoil in the financial markets and the impact that this has had on M&A, and talks about Livingstone's performance in this challenging environment.
A consensus appears to be emerging that the M&A and financing markets have now hit rock bottom and, all things being equal, the deal-making environment is unlikely to deteriorate further. Q1 2009 was a bleak period for most investment banking advisers as the aftershock from Autumn 2008 had acquirers, investors and banks scurrying for cover. A lack of any real certainty about the prospects for 2009 and a general sense of risk aversion has made it difficult for principals to commit to deals with any genuine enthusiasm.
However, Q2 saw a more positive tone developing. A significant global stock market rally, partly led by a recovery in confidence in the banks, has resulted in a warmer, fuzzier feeling of wellbeing (relatively!). A welter of macroeconomic data has emerged pointing to Q1 as representing the worst of the current recession, with an improved position predicted for the rest of 2009 and positive growth in 2010. In the UK, residential property prices may have started to stabilize and retail consumer spending has proven surprisingly resilient.
All of this is generating a greater appetite for deals among buyers, albeit no-one is betting the shop on bigger deals. Most of the transactions that we see achieving traction at the moment are at sub-£50m ($75m) deal values. Livingstone has completed 12 such transactions in 2009 across a broad spectrum of sectors, including digital media, environmental consulting, food and vocational training. The majority have involved sales to strategic buyers and opportunistic buy-outs of stressed assets. The private equity community is still being constrained by the limited availability of leverage; however, even the banks are starting to mobilise, although debt multiples remain at just 2.5x EBITDA.
What is the outlook for the remainder of 2009? Well, if it isn’t going to get any worse, at least a degree of confidence is creeping back into the market. At one level, this is all the M&A market needs to start motoring again. The Q2 market rally should still be regarded as fragile and capable of an abrupt correction in the event of unexpected bad news, but if the FTSE 100 stays above 4,000 over the Summer there is every chance share prices will continue to recover further, making buyers bolder and supporting a potential recovery in private company valuations.
We are still looking to complete circa 25 transactions in 2009, which implies a definite increase in deal flow. We are anticipating an increased level of interest among vendors contemplating a sale in 2010 and wanting to groom their businesses in the meantime. Valuations should start to improve but we do not anticipate a dramatic increase, rather a gradual improvement over the next 18 to 24 months. For the moment, however, the buyers are back and that will do for starters!!