Outlooks and Strategies 2009
Glass Half Full
Amid so much uncertainty, there are at least a few predictions we can confidently make for 2009:
- Demand for information will continue to grow.
- Middle-market M&A transactions will continue to get done.
- The sun will come up tomorrow.
Beyond that, there’s not a lot to be certain about in the coming year. But that just may be enough.
Current Market Outlook
Though the pace of Mergers & Acquisitions activity has slowed, and the highly leveraged deals of the past few years have disappeared, large strategic companies continue to seek growth through acquisition, private equity investors still have capital to deploy, and private owners are looking for timely exit strategies.
Prices are still strong for high-quality assets. Demand still exists for businesses that can demonstrate growth, profitability and a solid product/service. True, you won’t find ready financing on covenant-light terms, and leveraged transactions are very difficult, but most strategic buyers in our markets are healthy, qualified and willing to pay cash.
Over the next 12 months, many highly leveraged but otherwise sound companies will be forced to come to market. While we don’t anticipate a flood of these deals, they will bolster overall middle-market M&A activity in 2009.
Restructuring vs. Selling
Companies that have taken on unsupportable levels of debt, or whose performance is flagging in a slow economy, may need to restructure their operations and their balance sheets in 2009. Restructuring will enable some over-leveraged or under-performing businesses to survive the current challenging economic environment and perhaps prosper in the future when conditions improve, by strengthening their financial, strategic and competitive positions.
Not every business is a candidate for restructuring. Generally speaking, the stronger the underlying business model, the better the chances that a restructuring will add value to a debt-burdened business. Berkery Noyes has recently teamed with restructuring specialists Seneca Financial Group to provide restructuring advisory services to middle-market companies in our core markets segments.
Alternative Financing
While we expect tightness in the credit markets to continue at least into the second half of 2009, more companies are turning to alternative means of financing acquisitions, restructurings and day-to-day operations.
Among the more notable trends is the use of mezzanine debt, which offers an alternative source of capital to selling into a weak market, or as a stop-gap measure to tide a company over until a sale, IPO or more traditional financing can be accomplished. Typically, these instruments are senior only to equity. Because mezzanine capital is at inherently greater risk than secured or more senior debt, it is more expensive.
Other alternatives to traditional financing are minority investments, sellers taking paper from the buyer, and so-called "club deals" involving multiple sources of debt. These alternatives tend to require an investment banker as an intermediary who is knowledgeable in the given market and can accurately assess the asset values being financed.
Timing
While we have never been fans of trying to time the market, we do advise private sellers to prepare their businesses now for a transaction when markets turn around. The climate will eventually shift — whether that happens in the second half of 2009 or the first half of 2010 — and sellers that have tightened their operations, cleaned up their financials, and prepared for a sale will be in a better position to capitalize on improving conditions. We believe that when the break comes it will happen quickly; those prepared to go to market will benefit from pent-up demand.
One-On-One
The final trend we’ll note is the increasing popularity of the one-off M&A transaction. We are managing more of these on both the buy-side and the sell-side than at any other time in the past two decades. In essence, these transactions replace the traditional controlled auction involving a targeted universe of potential buyers.
On the buy-side, one-on-one deals can be quick, uncomplicated and confidential. A buyer knows exactly what type of business or product it needs to fill a gap in its offering, and retains us to identify and approach the target, then execute the acquisition.
For sellers, the one-off approach is a quiet, discreet method of selling a business. Often, buyers in one-on-one situations pay a premium for the target and avoid alerting competitors, customers and employees that the company is "in play". Sellers of less obviously attractive assets are more willing to consider one-on-ones than before, looking to avoid the potential risks of a failed auction.
In both the buy-side and sell-side situations, the keys to a successful outcome are market knowledge and global contacts. Our buy-side clients rely on us to find the right business from among the 45,000 we track in our database, and value it accurately, while our sell-side clients trust us to identify the best buyer based on some 14,000 transactions we’ve tracked in recent years and negotiate a deal that returns full value to shareholders while accommodating the seller’s non-financial objectives.
Looking Ahead
There is no doubt that the current market is challenging to companies across the information industry spectrum. While certain segments are undoubtedly suffering, others are holding up well (it’s not a bad time to be in the healthcare information or regulatory compliance software business, for example).
But no matter the particular industry vertical or market niche, there are at least two fundamental truths that prevail no matter the economic climate: (1) There is still no substitute to seeking growth through acquisitions and, therefore, (2) There are always buyers for good companies. The key to a successful outcome is an advisor who knows the market, understands the business, and has the tenacity and expertise to get the job done. As it has for more than 25 years, through up cycles and down, Berkery Noyes has done exactly that for our clients. No matter what happens in 2009 and beyond, that will never change.
2008 SOFTWARE INDUSTRY M&A
Although both the volume and value of Software M&A transactions decreased in 2008 from the two prior years, there are bright spots in an otherwise down market. The volume of infrastructure transactions actually increased last year, albeit only slightly, from the number of deals recorded in 2007.
Overall transaction volume decreased by 12 percent last year from the 2007 level while aggregate transaction value decreased by 51 percent, reflecting fewer large-scale (and typically highly leveraged) transactions in favor of middle-market deals. Happily, valuations were generally steady, with EBITDA multiples dropping by less than 2 percent year over year–and still well above the 2006 median multiple, suggesting that buyers are still willing to pay solid prices for attractive acquisitions.
To read the full report Click Here.
2008 ONLINE INDUSTRY M&A
While the total number of Online Mergers & Acquisitions transactions decreased by only 9 percent in 2008 from the previous year, the aggregate value of those transactions fell by 76 percent. These results underline the effect that tighter credit markets are having on overall media M&A activity: the large, highly leveraged transactions that drove aggregate values higher in 2006 and 2007 all but disappeared last year, while the market for mid-sized M&A transactions is still relatively strong.
Valuation multiples of companies that were merged or acquired in 2008 declined from 2.3 times revenues in 2006 to 1.7 times in 2008, a level consistent with historical valuations in the industry. We believe that these more supportable and sustainable valuations will encourage a resumption of M&A activity in the year ahead.
To read the full report Click Here.
2008 PRIVATE EQUITY M&A
Private equity transactions were most affected by tightening credit in 2008, as these buyers typically leverage their investment with significant debt. Total transaction volume in 2008 decreased by 33 percent over 2007, from 291 deals to 196 in 2008. The aggregate value of these transactions declined even more sharply, from $109.70 billion in 2007 to $23.92 billion last year, a drop by more than three-fourths.
Bucking that trend was the Healthcare and Pharmaceuticals market, where the total value of private equity-sponsored transactions more than doubled, to $4.16 billion in 2008 from $1.65 billion the prior year. Surprisingly, there was no change in the way private equity investors valued their acquisitions: expressed as a multiple of revenues, enterprise valuations remained flat over the three-years 2006 – 2008 at a constant multiple of two times revenue. Valuations as a multiple of EBITDA showed only moderate variation, actually rising in 2008 to 11.8 times earnings (before interest, tax, depreciation and amortization) from 10.9 times EBITDA in 2008.
To read the full report Click Here.
2008 INFORMATION INDUSTRY M&A
There were 231 fewer M&A transactions in the broadly defined information industry, representing a decrease by 13% from 2007, when 1,716 deals were completed. The aggregate value of the 1,485 deals closed last year was $85.92 billion, a decrease by 70% from the 2007 amount. That median enterprise valuations declined by just 20%, from a multiple of 2.5 times revenue in 2007 to 2.0 times last year, it stands to reason that the decline in transaction volume occurred at the top end of the value range, with little change in the number of smaller to mid-sized transactions over the past three years. In fact, fully one-third of M&A transactions involved companies valued between $7 million and $55 million.
This pattern is likely to hold in 2009, with a relatively steady pace of small to mid-sized all-cash M&A deals being completed across the information industry spectrum, and a dearth of large, leveraged transactions. Strategic players in the information markets continue to seek acquisitions that can provide new customers, new technologies and/or access to new markets, and these often entail niche businesses that bolt on or tuck into existing operations.
To read the full report Click Here.
NOTABLE TRENDS IN OUR CORE MARKETS
Healthcare & Pharmaceutical Information
Tom O’Connor, Managing Director
Jeffrey Smith, Managing Director
While there is no such thing as a truly recession resistant market, healthcare information comes closer than most. While the pace of M&A may slow in 2009, strong demand persists for companies whose products or services either improve the quality of care or lower its cost. Other trends include:
- strategics looking to acquire add-on opportunities;
- a growing preference for software-based solutions;
- unique, marquee products/companies will command premium value, "me-too" providers will not;
The pharmaceutical information market will continue to demonstrate strong demand in the areas of pharma technology, proprietary data, compliance tools, drug safety information. Value drivers in this market won’t change: brand leadership and patient outcomes are key.
Education
Peter Yoon, Managing Director
Within the broad education market, certain segments perform better in a weak economy. Enrollment in career colleges is increasing (along with revenues and profits) as displaced workers seek to bolster their skills to capture new employment opportunities. An increase in Pell Grants is providing more liquidity to the market, while the schools themselves are more inclined to carry student debt on their own balance sheets. As schools expand their capacity, ancillary beneficiaries are suppliers of marketing services that help build or retain enrollment.
On the K-12 side, data will continue to drive instructional and administrative spending. We expect fewer M&A transactions, with those that do get done centered on businesses that provide management and data tools–student information systems, data warehousing, business intelligence & analytics–that help schools do more with less. Other winners include publishers of non-basal textbooks, digital curriculum, and providers of learning resources that improve outcomes.
Financial Technology & Services/Business Information
Peter Ognibene, Managing Director
Dick O’Donnell, Managing Director
John Guzzo, Managing Director
With continued tight lending, commercial banks will turn more and more to fee-based services like wealth management, which will drive M&A activity as the hundreds of sizeable independent investment advisors are consolidated.
Amid all this uncertainty, providers of financial services are re-thinking their strategies. As they navigate the current turmoil, the question echoing through nearly every corner office is "what do I want to buy or sell to be in good shape 12 to 18 months from now?" Many are turning to advisors like Berkery Noyes for ideas and opportunities.
Media & Marketing Services
Kathleen Y. Thomas, Managing Director
As total ad spending shrinks, marketers continue to look for demonstrable returns on their marketing dollars. We will continue to see those dollars skewing toward digital marketing media, at the expense of print and broadcast. Face-to-face tradeshow and exhibition marketing is still a highly effective product information and marketing vehicle, though short-term cuts in travel budgets will impact some 2009 events.
While we expect fewer M&A transactions in 2009, strategic buyers will continue to seek complementary acquisitions to supplement existing revenue streams in their portfolios. We also anticipate an increase in divestitures of highly-leveraged properties acquired over the past few years.