Current state of the M&A market

Mon, 01 Dec 2008 | INDUSTRY INSIGHTS

Up until this summer, the small to mid-sized business M&A market has not been severely affected by the problems in the financial markets. However, as the general lack of confidence continues and lending remains very scarce it is now no longer immune. The almost complete lack of IPO's on both the main market and AIM, has meant a reduced number of businesses raising cash for acquisitions. Consequently, this has significantly reduced the total number of transactions being done.

On current deal values, Marc Fecher from Devonshire Corporate Finance comments: "there has been pressure on prices, mainly due to the EBIT multiples that banks are prepared to lend on coming down. Before the credit crunch last summer, it was common for banks to lend up to five times EBIT. This figure is now more like two to two and a half times."

However, the landscape is constantly changing and this is reflected, and could be argued is caused by, the large fluctuations in the stock markets. In addition, the reactive and unprecedented course of government and monetary policy has had a major part to play. The result is that it has become virtually impossible to forecast what is going to happen in any real time frame.

For nervous buyers or sellers nearing the completion of a transaction, advisers are finding it difficult to say with certainty whether their clients are sitting on a good deal. Instead they are trying to ensure that their clients remain fully informed and are aware they are taking on perhaps more risk than would have been the case twelve months ago.

However, there are still many reasons why entrepreneurs should still maintain their acquisition focus: people will always want to retire; owners will always have health issues; companies will need to find ways of solving problems and being bought is one of them.

So who is out there buying?

Trade buyers are still in the market looking to make strategic purchases. They are looking at new markets, higher return on capital, have a need to diversify and/or have cash cow businesses that need to reinvest and expand.

With regard to financial buyers there is understandably much uncertainty and many private equity funds are turning themselves into cash. However, they will come back into the market in time. Private equity funds have been unable to raise the same level of debt as previously. Some private equity buyers are providing their own underwriting facility to insure the financing. However, this all costs money.

Currently the best buyer in the market is the consolidator or platform builder who wishes to take advantage of the fragmented market in its sector. Recent purchases such as Melorio acquisition of Zenos, the Oxfordshire-based provider of vocational training services to the IT sector with 116 staff, for an initial £21m is one example.

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