Middle-market M&A activity is increasing, and the second half of the year is expected to be strong, said Maryann Waryjas, partner of Chicago law firm Katten Muchin Rosenman LLP.
The increase started at the end of Q1 and picked up in Q2, but there is some choppiness in there, she said during a speech at the 2010 AWA M&A Executive Forum in Chicago.
Enterprise value for larger companies, as measured by multiples of earnings before interest, taxes, depreciation and amortization, and revenue, are coming back to healthy levels. Enterprise value for midmarket firms also appeared to be rising in the second quarter.
A lot of the appreciation in value is dependent on the trailing 12 months, but because everybody knows how rough last year was, we are really looking more at the trailing six months, she said. Therefore, growth and stability in the first half of 2010 are very important.
As the lending markets open up, some banks are getting very aggressive in providing transaction financing. However, required equity contributions remain relatively high, usually more than 30 percent and some over 50 percent.
Other trends in the market include increased debt multiples in good deals, the comeback of recapitalizations, and leveraged buyouts remaining few and far in between.
Another deal driver, she said, is the change in the long-term capital gains tax rate, which will rise from 15 percent to 20 percent on Jan 1, 2011.
If you are contemplating being a seller, it makes sense to do the deal in 2010 rather than wait till 2011. As an example, she gave a firm with EBITDA of $10 million that would sell at a 7x multiple. While the proceeds would be $70 million in both cases, the difference in capital gains tax would be $3.5 million.
That's real money, she said, That's enough marginal increase to compel a lot of people who have been contemplating about whether to sell to move forward.
Although it usually takes six to nine months to complete a deal in the current market, the timing could start to improve as the market warms up and sellers work to close by Dec 31. Five to six months is likely, she said.
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