Mid-market appetite for M&A fails to account for banking
crisis
The onset of the banking crisis has not significantly dented
mid-market corporates' eagerness for merger and acquisitions
activity, a new research report from business and financial
advisers Grant Thornton suggests. The head of M&A at the firm
fears the lack of available finance means that corporate ambition
is unrealistic and will go unsated.
The Grant Thornton survey, Securing Finance, conducted with
mergermarket compares the outlook of 150 companies in September
before Lehman filed for bankruptcy with attitudes in late October
at the height of turmoil in the banking sector.
In September, 36% of respondents said they were expecting to
make an acquisition in 2009, but that level only fell to 31% eight
weeks later. However the number with 'no transactions planned' rose
from 40% to 48% over the same period and interest in joint ventures
and strategic alliances fell from 13% to zero.
Companies were broadly pessimistic about the task of securing
finance in the current economic climate with 51% conceding that
getting bank finance is 'difficult' or 'very difficult'.
David Brooks, head of M&A at Grant Thornton, believes the
prospect of 'bottom fishing' for distressed assets is encouraging
the positive attitude among many companies in the mid-market.
"Given the wider market conditions, the appetite for M&A
deals is striking", Brooks says. "Our 'stress-testing' in mid to
late October showed businesses appeared relatively immune to
the steady trail of bad news from the market but they are focusing
on acquisition opportunities rather than putting any faith in
relationships with others.
"Mid-market corporates appear to view the banking crisis simply
as the latest stage in the credit crunch and while it certainly
isn't helping, it hasn't had the profound impact that many had
thought. You have to admire that optimism but the economic
reality suggests that some companies are dreaming of the
opportunities without thinking about finance.
"Potential buyers undoubtedly believe that the onset of the
recession will create distressed opportunities and that the
transition to a buyers market will bring valuations down to
interesting levels. The speed and depth of the recession will
dictate how quickly, or if at all, activity picks up again in
2009."
Deal Breaker - valuations
While interest in M&A in 2009 is encouraging, valuations are
the battleground for mid-market activity at present and were
identified by 29% of respondents as the biggest influence on
causing deals to fail.
Brooks believes that the prominence of valuations in the survey
reflects the current mis-alignment of the expectations of buyers
and sellers. He says:
"The shift in the UK M&A market to a position where buyers
are hugely dominant will not happen overnight and, in the immediate
future, I expect more deals to flounder because the prices sellers
want to achieve are greater than buyers are prepared to pay. There
has to be convergence and in this market, it's the sellers who have
to make the decision to move.
"Buyers who are reluctant to overpay are price-chipping but are
coming up against sellers who are unwilling to deviate far from the
valuation multiples they believed they could achieve in the buoyant
2007 market. The choice for sellers is stark; get realistic on
pricing or don't sell."
Copies of Securing Finance - Funding transactions and growth in
today's economic climate are available by emailing: securingfinance@gtuk.com.