How to buy

Set your sights

With experts optimistic that the M&A market is starting to recover, Completion explores the best options for would-be buyers.

Mergers and acquisitions (M&A) always dwindle in a recession and the current downturn is a striking example. But economic slowdowns also bring opportunities to take advantage of low valuations and, after a very bleak 12 months, resourceful buyers are thinking again about how to fund new deals.

“We’re seeing pipelines starting to grow and there’s now a solid base of transactions happening for good commercial reasons at realistic prices,” says Paul Johnson, Head of Due Diligence at Baker Tilly. “The funding lines are starting to open again.”

Figures compiled by independent M&A intelligence service Mergermarket show that European mergers and acquisitions fell from €1.1 trillion in 2007 to less than €200 billion (£180 billion) in the first nine months of last year.

“It’s been very severe,” comments Giovanni Amodeo, Mergermarket’s Editor for Europe, the Middle East and Africa. “Buy-outs have been particularly badly affected. In the third quarter of last year, private equity-backed deals totalled just €2.7 billion, compared with €90 billion in the second quarter of 2007. The figures are barely comparable.”

In the mid-size M&A market, a global total of deals worth between $100 million and $1 billion, compiled by Dealogic, shows a 32% fall to $667.7 billion (£408.7 billion) in the year to the end of August 2009 – the lowest level since 2003.

However, this size of deal has accounted for about 22% of all M&A activity over the past three years and, while few people expect a quick return to the heady days of 2007, experts say they’re seeing a revival of interest. According to Dealogic, deal value for global mid-market M&A rose between the third and fourth quarters of 2009, from $170.6 billion (£104.4 billion) to $217.9 billion (£133.4 billion).

“We’re seeing a slight recovery,” says Mergermarket’s Amodeo. “The hottest area is Central and Eastern Europe, especially in the consumer, industrial, chemicals, technology, media and telecoms sectors. In the UK, we expect particular interest in technology, media and telecoms, energy and financial services.”

Buyer’s market

Trade buyers with cash and knowledge of their industry are in a particularly strong position.
“There are still plenty of private equity houses with money, but they struggle to raise any debt,” says Rob Donaldson, Baker Tilly’s Head of M&A and Private Equity. “Right now, private equity houses are finding it difficult to compete with trade buyers who have cash. If your business is stable and you are well funded, it’s a great time to be thinking about acquisitions,” he continues.
Johnson says the tightening of the credit markets means that buyers are having to put more cash or equity into transactions. “The amount of leverage is less, but in some ways that makes for a more solid structure,” he explains.

With valuations estimated to be up to 25% lower than a few years ago, buyers can increase the likelihood of getting a good price by being clear about their acquisition criteria. Priorities may include the scale and profitability of their target, entering a new market or expanding in an existing one. Building a rapport with key shareholders or directors at your acquisition target can also increase the chances of a successful deal.

Accelerated M&A on the up

Mergers and acquisitions in distressed circumstances, known as accelerated M&A, are becoming more common as distressed companies on the brink of collapse look for a quick sale. An accelerated M&A process involves the sale of a business with major problems, such as too much debt, heavy losses or untenable liabilities such as property leases.

Such deals have been particularly popular in the industries hit hardest by the recession, such as leisure and retail, notes Paul Elliot, Baker Tilly Corporate Finance Partner. One example is where businesses have fallen into the hands of banks.

In this situation, there are three common scenarios. The first is to sell the whole business for a fairly low price, with some or all of the debt rolled over or refinanced. The second is to sell the assets of a business through a pre-packaged administration, when advisers put a company into administration quickly, wipe out its debts and sell it on immediately. The third is for banks to sell a company’s debt so that the buyer becomes the major creditor.

Another form of accelerated M&A can occur when a group sells a struggling subsidiary to a private equity firm. Completion times for deals can vary from two weeks to a year, says Elliot. “Buyers are facing situations where vendors are very keen to exit, and if a buyer reckons it can implement a restructuring plan or buy a business it can see value in, then it can get some pretty good deals at the moment.

“In a normal sale, price is top of the list, but [in accelerated M&A] getting the business off the books is at least as important as getting a fantastic price,” he adds.

Vendor financing: a win-win situation

Under a vendor financing arrangement, a buyer effectively borrows money from the seller by withholding part of the proceeds – the buyer will only pay part of the asking price on day one. An example is The Carlyle Group’s €749 million buy-out of Greek chemicals business Neochimiki last year.

This makes sense for both sides. The lack of availability of bank finance has stopped many deals from happening. With these types of arrangement, the vendor gets their sale and the buyer gets the finance they need to complete the deal. However, there is a risk for the seller because it is in effect becoming a bank and faces the possibility that the buyer may default on the loan.

Donaldson says vendor financing has become more common over the past year, estimating that about one in four mid-market deals are now vendor-financed, compared with about 5% a couple of years ago.

“We’re doing a [vendor-financed] deal at the moment,” he says. “It is a £22 million transaction and we’ll pay the vendor £12 million on day one. The vendor will lend us the remaining £10 million. They get interest on the money they’ve lent us, and security over the business. If we don’t pay them back, they can take the business back. It helps us as we don’t need to raise bank finance.”

When MBOs appeal

One exit route which should always be considered is a sale to management or management buy-out. During the boom, private equity would have been considered alongside trade buyers as a matter of course. Debt was in plentiful and cheap supply and as a result private equity could match or even better the prices achieved by a sale to trade. One of the biggest areas to suffer during the credit crunch has been the buy-out market. As leverage has been reduced, so too have the valuations that private equity can achieve. “MBOs are being done but the volumes are right down,” says Kirsty Sandwell, a partner in Corporate Finance at Baker Tilly.


However, it’s not all doom and gloom and there are signs of life that for the right sort of opportunity MBOs are back on the agenda. Indeed, Mergermarket’s figures show that the number of private equity buy-outs jumped by 33%, from 21 to 28 transactions, between the first and second quarters of last year. Private equity-backed MBOs in 2009 included the £71 million buy-out of Formula 1 racing team BAR Honda and the £30 million purchase of Denby Pottery Company.

As ever, there are some sectors that are more fertile than others. “Things that were considered steady and boring in boom times are now thought to be quite exciting,” says Sandwell.