Friday, April 9, 2010

Smaller And Medium Size Companies Hot Targets For Mergers And Acquisitions

by Suzanne McGee Apr 09 2010


Image: iStockphoto and Sean Driscoll

This is shaping up to become one of the hottest markets for baby boomer owners of family businesses or other entrepreneurs who are interested in selling their companies.

For several months now, massive transactions such as the grueling battle for control of Cadbury PLC (in which Kraft Foods Inc. and its $21.4 billion bid finally triumphed in February) have been stirring a sense of revival in the long-dormant merger and acquisition market. But the real action—and much of longer-term profit for Wall Street—rides on what is happening behind the scenes, in the arena where mid-market M&A is structured.

R.W. Baird, one of the many investment banks specializing in deals involving small to mid-market companies, noted that the number of M&A transactions involving these businesses soared 31.6 percent above year-earlier levels in February alone to 799 transactions. The dollar value of those transactions hit $107 billion, a 544 percent increase.

Confirming the trend, the National Venture Capital Association last week reported that the first quarter of 2010 saw more M&A deals involving venture-backed companies than it has recorded in any quarterly period since it began keeping track way back in 1975. A total of 111 venture capital-financed companies were negotiated in the first three months of the year, …. And the value of those deals? Well, that hit an average of $180.2 million—21 percent than the average value of deals done in all of 2009.

What that means, investment bankers agree, is that this is shaping up to become one of the hottest markets for baby boomer owners of family businesses or other entrepreneurs who are interested in selling their companies. Strategic buyers—larger rivals—are eager to boost their revenues and profits, and an acquisition is the most straightforward way to do that after they have spent the last two or three years cutting costs to the bone.

Mid-market buyout funds, … are heading back into the market and hunting for attractive deals. “For a high-quality company that has run into a glass ceiling—it has operational barriers to growth or can’t go global on its own or is struggling to find capital for further expansion—the M&A environment couldn’t be better right now,” says Parker Weil, a mid-market banker and managing director at Bank of America.

While everyone is peering over the shoulders of giant players like Blackstone and KKR, eager to see what kind of coup they will pull of next, Weil says there are 150 or so buyout shops in the tier just below that, each of which could complete 10 to 20 acquisitions over the next 18 months. Then there are the corporate buyers, who have also emerged from the shadows. “They need to show growth, and they can’t always do that organically,” Weil says….

Parker Weil, who also is involved in a seemingly endless series of conversations with entrepreneurs and owners interested in selling their businesses and eager buyers and investors who are willing to help finance the transactions, … The mid-market is the sweet spot of the M&A universe, he argues, calculating the optimal deal value at around $500 million. …

These days, Wall Street is drawing the ire of critics of its proprietary dealmaking and trading businesses, operations that have been very profitable, but that various reform proposals seek to curb, make less profitable or eliminate altogether. Going forward, the question may be whether Wall Street firms find a new source of more stable earnings to replace that, in the form of fees that can be levied on the assets its brokers and wealth managers manage for those clients who use their M&A teams to sell their businesses.

It will be up to those clients—the entrepreneurs seizing the opportunity to find a buyer for their business in what several bankers described to StreetWise as the beginning of a boom in mid-market M&A—to decide if they want to contribute to Wall Street’s well-being by entrusting them with their liquid wealth. …

Even better, suggests Josh Lerner of the Harvard Business School, if they do decide to respond to those initiatives, “this will be more of a seller’s market as we move forward. If a recession is kind of like the Grim Reaper, causing a lot of companies to fall by the wayside, it also means that those smaller and entrepreneurial businesses that survive are the strongest.” With a bevy of these robust survivors available—at least some of whose owners and CEOs have been reminded that when credit crunches hit, smaller businesses tend to suffer disproportionately—no wonder mid-market dealmaking is the hottest part of the M&A universe.

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