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March 2010

Time to come out of hibernation?

Last year was a difficult year for M&A worldwide – with many advisers downsizing significantly and going into “hibernation”.  Thomson Reuters reported European M&A down 65% from the peak.  Meanwhile, in a sign of the times, Mergermarket reported a 370% increase in insolvency deals to a level just short of the quantum done over the previous four years.

So is it time to come out of hibernation?  What is this year going to be like?  The government tell us we have come out of recession.  But then in a recent Harris poll just 10% of people said they believed government figures.  So who to believe?

At a local level in East Anglia we are already seeing some signs of life in the market.  PEM Corporate Finance has recently completed two transactions – the acquisition of ISIS Fertility by Bourn Hall and the acquisition of Elmy Landscapes by Flora-tec.

The acquisition of Colchester based ISIS gives Cambridge based Bourn Hall greater ability to provide its world class fertility treatment services to patients in Essex and Suffolk.  Cambridge based Flora-tec’s acquisition of Ipswich based Elmy gives it greater coverage in Suffolk and the east of the region.  It also gives it the ability to leverage Elmy’s particular expertise in the maintenance of school and sports-grounds.  Interestingly both Bourn Hall and Flora-tec were management buyouts and are making their first acquisitions post buyout.  These are excellent growth opportunities for our clients, and show that there are deals to be done where there is a good strategic fit.  Since completing these transactions we have seen a pronounced upturn in new instructions and enquiries.

This upturn is being driven by some recovery in the multiples being paid for businesses, slightly better liquidity available from the banks, and above all by a gradual return of confidence.   But despite increased confidence entrepreneurs feel it will be a slow upturn.  A recent Bowmark Capital survey found that just 14% foresaw recovery in the first half of 2010, 45% in the second half of this year, and 26% felt it would take until the first half of 2011.

One symptom of the recession last year was the very slow pace at which transactions progressed.  Now, for those able to do a quick deal, the prospect of realising value before a change of government and a much predicted change in the tax regime, is putting some welcome pace behind transactions.

Another feature of the coming year will probably be a greater proportion of trade buyers to private equity buyers than of late.  Trade buyers making strategic acquisitions should benefit from operational synergies.  However Private Equity buyers will neither benefit from synergies nor be able to raise the high level of bank debt that used to allow them to leverage their deals.

Technology deals have been hit during recession, with one commentator reporting the North American market at a 15 year low.  The same commentator now forecasts a doubling of activity in 2010.  Pricing is improving in the tech market too – Regent Associates report a steady increase in multiples paid for technology business since Q2 of 2009.  This was probably the low point due to the high level of distressed sales then being conducted at knock down prices.

So overall the picture is more positive than it was.  But one should be cautious about forecasting.  As American economist Paul Samuelson said, “the stock market has forecast nine of the last five recessions”.  Just as dangerous to be over optimistic – but increasing confidence should be self fulfilling provided there are no more shocks to the system.  

Don't mention green shoots...........

We've recently completed another transaction - the acquisition by Cambridge based Flora-tec of Suffolk based Elmy Landscapes .

Flora-tec-cropped Flora-tec is one of the UK’s leading corporate horticulture companies - essentially is supplies and maintains any plants that a corporate might require.    It is based in Cambridge and it operates throughout the UK from branches in Ware, Esher, Birmingham, Chester & Leeds.   Customers include Hand Picked Hotels, Sharp, Fujitsu, Roche and The Audit Commission.
Flora-tec was formerly part of Cambridge based Unwins, and was the subject of a management buy-out led by Andy Bradley in 2007.

Elmy was founded in 2000 and its focus is the provision of grounds maintenance and landscape services with particular expertise in looking after school and sports-grounds.  Its clients include Colchester Borough Council, Carillion and Suffolk County Council.   Elmy has recently won the contract to provide landscape maintenance to the new Cambridgeshire guided Busway (assuming its every completed).   Peter Elmy is going to be a consultant.

Helen Drayton at Hewitsonsin Cambridge did the legal work for Flora-tec.

I'm always impressed at the deep well of cliches and familiar phrases that the press have a their finger tips when covering transactions - so I was half expecting headlines along the lines of "green shoots of recovery" for this one.    Given the fragility of the recovery I think that'd be tempting fate.   Full marks then to Tony Quested of Business Weekly,  for "Plant firm branches out with acquisition"!  Runner up prizes to Business in East Angliafor "New year deal flower at Flora-tec"  and Horticulture week'smore prosaic "Elmy Landscapes bought by Flora-tec"

Interestingly - and entirely coincidently - both this deal and the Bourn Hall acquisition of ISISI posted about recently involved management buyouts which had prospered post buyout and moved on to making their first acquisition.  Not only that both deals involved companies in Cambridgeshire acquiring businesses in Suffolk. More details of both transactions on our website.