California Dealmakers More Optimistic About M&A Environment

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ACG-Thomson Reuters Mid-Year 2010 DealMakers Survey Reveals Obstacles and Opportunities for M&A and Private Equity Investing

After 18 months of pervasive gloom, dealmakers from California are increasingly more positive about the M&A environment, according to the twice yearly ACG-Thomson Reuters DealMakers Survey.

The latest survey results reveal a sunnier sentiment about the dealmaking environment. While the last three surveys were consistently dreary, with more than 80% of dealmakers reporting a fair to poor M&A environment, the most recent survey reports that 82% of California dealmakers expect an increase in M&A activity in the next six months.

The survey, by the Association for Corporate Growth® and Thomson Reuters, polled investment bankers, private equity professionals, corporate development officers, lawyers, accountants and business consultants in March and April 2010.

Dealmakers expect the following sectors to experience the most merger activity in the second half of 2010:

  • Business Services (24%)
  • Manufacturing and Distribution (18%)
  • Healthcare/Life Sciences (16%)
  • Technology (11%)

They expect the following sectors to experience the most organic growth:

  • Technology (21%)
  • Government-related (18%)
  • Healthcare/Life Sciences (18%)
  • Manufacturing and Distribution (14%)

Eighty-eight percent of survey respondents identified the current environment as a buyer's market. 87% expect strategic investments to accelerate in 2010.

"Deals are justified by the numbers; successful deals are finalized through relationships. In fact, ACGSV just hosted 250 Silicon Valley top 'C' executives and service providers at our annual GROW! Awards networking dinner on April 28 at the Valley's Computer History Museum. It's where business folks meet, build trust, and get things done!" says John Stringer, President of the board of ACGSV.

The greatest drag on M&A activity today is sellers unwilling to sell at multiples offered, according to 43% of dealmakers. This is followed by the credit crunch (33%).

Although average middle-market EBITDA levels have fallen to 12.5x in the first quarter of 2010 from a high of 13.9x during full-year 2007, according to Thomson Reuters, dealmakers are still looking for bargains. In fact, 79% of private equity professionals polled expect to pay no more than 5x EBIDTA for companies over the next six months.

According to Thomson Reuters, the volume of all worldwide mergers and acquisitions totaled $573.3 billion during the first quarter of 2010, a 21% increase over the first quarter of 2009.

Private Equity Strategies for Success

Private equity professionals across the country say the best strategy for success in the current environment is:

  • Focus on portfolio companies (57%)
  • Focus more on deal sourcing/marketing (47%)
  • Proactively communicate with LPs (45%)

They say the best strategies for portfolio company success are:

  • Cut costs (59%)
  • Focus more on marketing (44%)
  • Diversify by industry (25%)

Private equity executives say that this year they expect the majority of their portfolio companies to experience:

  • Job growth (30%)
  • Job cuts (7%)
  • Same staffing levels (63%)

In the past 12 months, 35% of private equity firms say they have marked down their portfolio company values, 43% have held values steady, and 22% have marked them up.

Portfolio companies are showing signs of improvement. Seventy-four percent are performing above their prior year EBITDA, while 26% are performing below last year's EBITDA.

Industries that present the best opportunities for buyouts are:

  • Business Services (32%)
  • Healthcare/Life Sciences (19%)
  • Manufacturing and Distribution (15%)

Industries that present the best opportunities for distressed investing are:

  • Manufacturing and Distribution (41%)
  • Financial Services (17%)
  • Real Estate (15%)

"As the economy improves, the business services sector is expected to gear up quickly to help companies grow, while real estate, finance and manufacturing present good opportunities for distressed investing," said Jim Beecher, publisher of Buyouts, a Thomson Reuters publication.

Private Equity Professionals Forecast Increasing Leverage Levels

Private equity professionals are optimistic that the debt markets will continue to rebound, with 73% saying they will improve over the next six months, 22% saying they will remain the same and only 5% saying they will worsen.

Respondents say the maximum leverage level in today's environment is:

  • 1-2x (14%)
  • 2-2.5x (38%)
  • 2.5-3x (32%)
  • 3-3.5x (12%)
  • More than 3.5x (4%)

Most private equity professionals (52%) expect leverage levels to increase in the next six months, but at the same time, more than half (55%) expect to invest 40% or more equity in companies in the next six months.

Some 53% of private equity respondents are concerned about the public's perception of private equity. This is an increase from 47% in December 2009.

Three quarters of private equity firms are concerned about a draft U.S. bill that would require advisors of private equity funds and hedge funds to register with the SEC, thus forcing more disclosure to regulators and investors.

"Middle market private equity firms play a vital role in our economy, adding financing and strategic assistance to help companies grow and add jobs," said Gary A. LaBranche, CAE, ACG President & CEO. "As we move beyond the recession, it is essential that policy makers support the efforts of private equity firms, corporations and capital providers to put investments to work to grow jobs and support the economic recovery."

Survey Methodology
The twice-yearly survey, conducted in March and April 2010, was completed by 681 ACG members and Thomson Reuters customers, including 42 from California. Respondents from California were comprised of private equity, venture capital and buyout firm members (19%); investment bankers, intermediaries, brokers (40%); lenders, finance providers (5%); corporate professionals, entrepreneurs (7%); limited partners (0%); and service providers, such as lawyers, workout specialists, accountants and consultants (29%). For a copy of the full survey results, please go to: http://www.acg.org.

About ACG
The Association for Corporate Growth (ACG) is the global community for middle market M&A dealmakers and business leaders focused on driving growth. ACG members have access to data, content and networking to access capital, make deals and drive corporate growth. Founded in 1954, ACG has grown to more than 13,000 members organized in 54 chapters throughout North America, Europe and Asia. For more information, please visit http://www.acg.org/sv/

About Thomson Reuters
Thomson Reuters is the world's leading source of intelligent information for businesses and professionals. We combine industry expertise with innovative technology to deliver critical information to leading decision makers in the financial, legal, tax and accounting, healthcare and science and media markets, powered by the world's most trusted news organization. With headquarters in New York and major operations in London and Eagan, Minnesota, Thomson Reuters employs more than 50,000 people and operates in over 100 countries. Thomson Reuters shares are listed on the Toronto Stock Exchange and New York Stock Exchange. For more information, go to http://www.thomsonreuters.com.

Contact:
Jen Dowd
212-209-3844
Jen(dot)Dowd(at)BackBayCommunications(dot)com

John Stringer, President
(408) 358-1527 JStringerbiz(at)gmail(dot)com

Sally Pera, Corporate Sponsorship
(650) 533-5337 sally(at)peraconnect(dot)com

Micky Robledo, Executive Administrator
(408) 279-1954 acgsiliconvalley(at)acg(dot)org

Mailing Address:
ACG Silicon Valley
C/O Micky Robledo, Executive Administrator
295 North 10th Street
San Jose CA 95112

Editors Note: ACG leadership is available for interviews. Please contact Jen Dowd for assistance.

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