Many in the city have done well during 2009 on the back of large corporate takeovers or companies restructuring their balance sheets through rights issues and other secondary offerings, some with a view to acquisitions. However for many in the corporate finance community, especially in the mid market, 2009 could be a year to forget with deal volumes in the mid market substantially down and many firms being forced to materially reduce team sizes in order to survive. 

During 2009 many companies became very inwardly focused, putting their own house in order rather than actively exploring transactions.  In addition, due to difficult credit markets and a perception that only distressed businesses would be for sale, many companies simply sat on their hands.  Moreover, the expected wave of distressed companies ripe for bargain hunters never seemed to materialise due to a number of factors, including:

• low interest rates which meant that serviceability of existing debt was much easier;
• the fall in security asset prices and political pressure meant that banks were more willing to let companies try and work through rather than force the issue and take the likely write off;
• HMRC being extremely supportive in the form of deferred tax payments; and
• the reduction in sales levels allowed companies to reduce stock and working capital needs.

However since the summer, credit markets have been steadily improving and the level of deal activity has increased materially with most firms reporting an improvement.  According to market data mid market deal volumes were up 31% in the last quarter of 2009.

Where we have been selling businesses we have, in the main, found strong buyer interest as many companies with cash are using the opportunity to get stronger and take market share to fully capitalise as the economy starts to improve.  In addition we are seeing a lot more people discussing exit planning as they balance the likely exit multiples now versus those of the future, against greater certainty especially given likely tax changes post the election. 

In our experience the prices being paid for businesses are, in most cases, lower than the heady days of 2007, although if you find the right strategic buyer good prices can be achieved.

There is more pressure being applied to companies in financial difficulty as both HMRC and banks are starting to tighten up.  If interest rates start to move and companies see sales growth coupled with the need to restock, these could put further pressure on companies which could be the start of more distressed sale activity (accelerated M&A). 

All these factors suggest that the mid market for M&A is likely to be busier into 2010 but that increase is fragile and the election, tax changes and the economy are all likely to play their part.

If you would like to discuss any of the points above or any other corporate finance matter please contact Andrew Killick 07771 945 513 or Adam Fraser-Harris on 01483 307094.