Don't mention green shoots...........
Guarded Optimism

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.  


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