Stark choice facing sellers – get real on price or no deal

Dec 3 2008 by Peter McCusker, The Journal

THE onset of the banking crisis has not significantly dented mid-market corporates’ eagerness for merger and acquisitions, according to a new report.

The Grant Thornton survey, Securing Finance, compared the outlook of 150 companies in September before Lehman filed for bankruptcy in late October at the height of turmoil in the banking sector.

In September, 36% of respondents said they were expecting to make an acquisition in 2009, but that level fell to just 31% eight weeks later.

However, the number with no transactions planned rose from 40% to 48% over the same period and interest in joint ventures and strategic alliances fell from 13% to zero.

Companies were broadly pessimistic about the task of securing finance in the current economic climate with 51% conceding that getting bank finance is difficult or very difficult.

David Brooks, head of M&A at Grant Thornton, believes the prospect of ‘bottom fishing’ for distressed assets is encouraging the positive attitude among many companies in the mid-market.

He says: “Given the wider market conditions, the appetite for M&A deals is striking.

“Our stress-testing in mid to late- October showed businesses appeared relatively immune to the steady trail of bad news from the market but they are focusing on acquisition opportunities rather than putting any faith in relationships with others.

“Mid-market corporates appear to view the banking crisis simply as the latest stage in the credit crunch and while it certainly isn’t helping, it hasn’t had the profound impact that many had thought.

“You have to admire that optimism but the economic reality suggests that some companies are dreaming of the opportunities without thinking about finance.

“Potential buyers undoubtedly believe that the onset of the recession will create distressed opportunities and that the transition to a buyers’ market will bring valuations down to interesting levels. The speed and depth of the recession will dictate how quickly, or if at all, activity picks up again in 2009.”

Steve Plaskitt, corporate finance partner at Tait Walker in Newcastle, who heads one of the region’s largest dealmaking teams, said: “We are still seeing good companies attracting buyers, but many smaller companies are finding it harder as valuations fall.

“Three years ago if the valuations between buyer and seller didn’t match, we could find imaginative ways of getting the deal complete, by making payments over a period of time or securing cheap bank finance.

“Sellers’ price expectations are coming down, but some buyers cannot get access to the bank finance they could previously. So it can be a difficult to match vendors and sellers’ expectations.”

Tait Walker recently completed its biggest ever deal handling the sale of the Specials Laboratory in Prudhoe to Irish-based United Drug for £20.1m deal.

While interest in M&A in 2009 is encouraging, valuations are the battleground for mid-market activity at present and were identified by 29% of respondents as the biggest influence on causing deals to fail.

Brooks believes that the prominence of valuations in the survey reflects the current misalignment of the expectations of buyers and sellers. He says: “The shift in the UK M&A market to a position where buyers are hugely dominant will not happen overnight and, in the immediate future, I expect more deals to flounder because the prices sellers want to achieve are greater than buyers are prepared to pay. There has to be convergence and in this market, it’s the sellers who have to make the decision to move.

“Buyers who are reluctant to overpay are price-chipping but are coming up against sellers who are unwilling to deviate far from the valuation multiples they believed they could achieve in the buoyant 2007 market. The choice for sellers is stark; get realistic on pricing or don’t sell.”