Some unexpected bright spots appeared in the outlook for mergers and acquisitions yesterday during a workshop for local executives, which was co-sponsored by Connect and the San Diego offices of the Allen Matkins law firm.
The overall M&A market is bleak. But John Stiska, who oversees venture lending for the San Diego office of Agility Capital, says the regional picture is not as bad as he would have expected. That’s because mid-market equity funds are still looking to buy “decent” companies. To Stiska, “decent” means stable, medium-size companies that generate between $15 million and $50 million in annual revenue, and which show positive earnings before accounting for interest, taxes, and other costs.
“In Southern California,” Stiska says, “that’s largely the defense contractors that have been developing new technologies for both military and commercial customers. We have a lot of them in Los Angeles, Orange and San Diego Counties. They have stable backlogs. They’ve done pretty well in the past couple of years.” Stiska says he’s encouraged because many mid-market equity funds, which raise their investment capital from big insurance and pension funds, still have lots of capital—typically $300 million to $800 million.
Stiska says he also was surprised because roughly half of the San Diego executives who attended the workshop indicated they’re not looking to sell their companies—they’re looking to buy another company.
Clark Libenson, a San Diego lawyer who specializes in mergers and acquisitions, told me the M&A program usually consists of presentations on how to prepare a company for sale. It’s one way that law firms discreetly market their services. But organizers wanted this workshop more closely tied to current market conditions, so presentations by Stiska and others showed how M&A activity has changed since the credit crunch essentially shut down financing in the second half of 2007—a full year before the credit crunch hit the rest of the market. Highlights from their presentations on the 2009 outlook include:
—Capital constraints will continue to limit M&A activity, but cash-constrained companies will likely sell divisions that are not central to their core business so they can raise cash and weather the storm.
—“Mergers of necessity” will likely emerge as a prevailing theme.
—Conditions point to a buyer’s market, with capital-rich companies acting as key consolidators—and beneficiaries. By some estimates, S&P 500 companies have an aggregate $630 billion in cash.
—Creative financing structures, private investments in public equities, and stock deals are likely to be more prevalent in M&A transactions.
—Companies unable to refinance their debt will be forced to consider such alternatives as restructuring, selling assets, or selling the company—with pre-arranged sales under bankruptcy becoming more popular.
—Mega deals have come to a dead stop since July 2007, but middle market transactions have continued, albeit at a slower pace—partly because they typically require a smaller percentage of debt financing. Since 1998, more than 90 percent of all M&A transactions have been under $500 million.
