Survey: Middle-Market M&A Professionals Frustrated With Market

The latest survey of middle-market merger professionals by the Association for Corporate Growth (ACG) and Thomson Reuters reveals frustration with the current M&A environment, but cautious optimism for the next six months.
 
According to the ACG-Thomson Reuters Mid-Year 2008 DealMakers Survey, the percent of middle market mergers and acquisitions professionals who say the current M&A environment is good or excellent has dropped to 43% from 93% 12 months ago. The figure was 72% in December 2007. 
 
The more than 500 investment bankers, private equity professionals, corporate development executives, lawyers, accountants and business consultants polled say the greatest obstacle to M&A activity is the weak economy (45%).
 
According to Thomson Reuters, the volume of all worldwide mergers and acquisitions totaled $1.6 trillion in announced deals during the first half of 2008, a decrease of 36% over the record-breaking first half of 2007. Of this total, M&A deals in the mid-market, defined by Thomson Reuters as transactions under $500 million, fared better. Less reliant on the global credit markets, they declined only 18.2%, with a total value of $368.9 billion.
 
Despite the decline, 32% of survey respondents say the number of M&A transactions will increase in the second half of 2008, up from only 25% six months ago, perhaps signaling a market bottom. Twenty-eight percent say merger volume will decrease, while 39% say it will remain the same.


The middle-market dealmaking environment has slowed, but good deals continue to get done, and some merger pros are expressing optimism that the pace of dealmaking may have hit bottom and could be flat to up a little over the second half of the year,"said Harris Smith, ACG Chairman and Managing Partner of Strategic Relationships at Grant Thornton. "The middle market has always been less reliant on debt to fund deals, and many private equity firms and strategic buyers have a lot of equity to draw on for minority or majority investments." 

 
A notable finding of the survey is the emergence of a buyer's market. Respondents indicated that the balance of power between buyers and sellers of businesses was upended over the last year, with 68% saying it is now a buyer's market, 11% calling it a seller's market, and 21% saying they are unsure. In June 2007, 75% said it was a seller's market, 13% a buyer's market, and 12% were unsure. The shift was evident in December 2007, when 39% said it was a buyer's market, 33% said it was a seller's market, and 28% were not sure. 
 
"It has taken a long time for the pendulum to swing, but market conditions clearly favor the buyer, and this is one of the most significant changes we've seen,"said Jim Beecher, publisher of Buyouts Magazine, a Reuters Media publication. "It can take a while to realize profits, but private equity performance can thrive in an environment such as this. For the right acquisitions made at a more reasonable price, there will be big gains to be made once the economy rebounds."
 
Other points of optimism revealed in the survey include an increase in the last year to 76% from 52% of M&A professionals who say the debt markets will improve in the next six months. Also, dealmakers point to distressed deals (29%), good multiples for acquirers (25%), and large capital reserves of some acquirers (21%) as facilitators of M&A.
 
Private Equity
The survey is particularly focused on private equity, and among private equity respondents, over the next six months, most expect the deal pace to stay the same (43%), with 30% expecting more deals, and 27% expecting less.
 
Private equity professionals say today's greatest threats to their business are: the credit crunch (54%), overall economy (50%), competition with other private equity firms (29%), possible tax changes on carried interest (26%), and regulatory scrutiny

(22%).
 
The aspects of their jobs that are the most difficult now are: securing debt for transactions (45%), winning and closing good deals (41%), identifying good investments (38%), fund raising (25%), and exiting investments (24%).
 
According to survey respondents, geographically, the best investment opportunities are in the U.S. (48%), China (12%), Latin America (8%), India (7%) and Eastern Europe (6%). The most attractive industries for investments are manufacturing and distribution (23%), healthcare/life sciences (19%), and business services (13%).


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