After a slow start, the M&A market is poised to take off in the second half of 2012.
The M&A market had its slowest start since 2003, despite a few talked-about deals, but activity is starting to pick up, setting the stage for a strong second half, said Maryann Waryjas, partner at Chicago law firm Katten Muchin Rosenman LLP.
“Q1 is going to be a bit choppy, based on early reports, but as the year goes on you're going to see more positive growth. Confidence and credit ability continues to improve,” Waryjas said April 16 at the AWA Alexander Watson Associates Mergers & Acquisitions Executive Forum in Chicago.
Despite slow growth, 2012 has had some positive signs.
During the first quarter, many companies recouped losses from previous years. In general, balance sheets are strong and have less leverage, and earnings growth outlook is looking positive, she said in a forum presentation.
Companies also have started to “get a grip” on valuations — 84 percent believe their valuation of assets will increase or remain stable over the next 12 months, a big improvement from last year, she said.
Valuation multiples appear to have stabilized at normal levels, and enterprise values for midmarket and large companies with good prospects — based on revenue multiples and earnings before interest, taxes, depreciation and amortization — are relatively healthy, she added.
Transaction funding is becoming more available and will no longer be an impediment for most companies, but despite improved lending conditions, required equity conditions will remain high, around 25 percent, she said. Tha's an improvement from last year, when it was 30 percent or higher, she added.
“We are seeing the appetite to do deals. We are seeing the appetite for lenders to come in and finance transactions, so that's a positive change.”
Over the last few years, many companies have refinanced in an effort to improve capital structure, reduce interest costs and extend maturities, she said. Many of these amendments or extensions will come up again in 2012-13, indicating the potential for more activity later in the year.
Those who can't make a strong case for refinancing, even in an improved credit market, may have to look at a liquidity event or alternate method of capital infusion, she added.
Executives' outlooks are also changing. Companies are starting to transition from defensive strategies, like cutting costs, protecting assets, and shoring-up capital structure, to focusing on strategic initiatives and competitive advantages, she said.
Some companies are feeling the pressure to grow and innovate from activist shareholders or private equity groups. Those that weathered the recession are looking for ways to prevent their business from having another downturn.
The companies that focus on strategic growth will emerge as strong competitors over the next few years, Waryjas said.
Going forward, companies will need to show strong EBITDA and trailing 12-month earnings. They'll also need to prove stability and show solid prospects for the 2012-13 fiscal years.
“You may have dropped in ‘09 to ‘10, we all have, but a pattern of several quarters of positive growth is key,” she said.
Smaller and midsize companies will need to be more competitive to get ahead. To succeed, they'll need to distinguish themselves to both customers and the broader market, she said.
Capital investments are driving the development of new products and manufacturing innovations, something large and small companies should consider, she said.
Packaging continues to be an attractive industry to private equity groups, but companies looking to attract a private equity buyer need to have certain things in place. Waryjas recommended that sellers prepare audited financial statements, ensure they understand the buyer's motivations, and have the right people involved at the right time. Sellers should also consider the form of the transaction and be ready to deliver a ready-to-run business.
Family-owned and privately owned companies should have a corporate governing structure in place, to reassure buyers that family members or investors won't waylay the deal, she said.
Deals are currently taking about five to seven months to complete, longer than in the “golden age” of 2005-07, largely due to global events that temporarily freeze the market, like the Greek-government debt crisis or the Egyptian revolution, she said.