“The best thing that I can say about 2009 is that it’s over,” says Eric Malchow, a managing director at Chicago-based investment bank
Though the environment will remain challenging due to the credit shortage, market participants expect to see a burst of M&A activity early in 2010 brought on by economic improvements as well as by sellers scrambling to beat the impending increase to the capital gains tax.
Moreover, buyout firms are eager to put their stagnant investment dollars to work in new deals and return capital to investors with a round of exits.
Full-year 2009 was down on all points compared to 2008. U.S. buyout shops closed 530 control-stake deals last year for a disclosed value of $34.7 billion, a 39% shortfall compared to 2008’s LBO deal count of 872 and a 75% dive from $137.0 billion in disclosed value last year, according to Thomson Reuters (publisher of PE Week).
In addition, the only three multi-billion-dollar deals to close in 2009 all came in the final quarter and, perhaps to nobody’s surprise, the largest of the bunch was born from distress.
In the year’s only 11-figure LBO, buyout/hedge fund managers
Next in line was The
The fact that these deals got done could be a sign that more will come in 2010. “There is a momentum affect in M&A, especially as the cycle turns,” Malchow says. “Seeing some well-known firms doing deals will start to build confidence in others.”
Portfolio maintenance was the mantra among the buyout community in 2009, a fact that was born out in the deals that did close. Of all deals that closed in 2009, almost half (48%) were add-on acquisitions to existing portfolios, up from 37% in 2008.
For example, all of
Traditional LBOs of standalone companies accounted for about 37% of deals last year, down from 49% the year before.
In terms of deal size, as the credit drought continued throughout 2009, smaller transactions (which presumably require less debt) accounted for a larger portion of the dealscape. Of the 117 deals with disclosed values that closed last year, 81% had total purchase prices of less than $250 million. In 2008, the percentage of such deals was 66 percent.
Blackstone, which acquired Busch Entertainment for $2.7 billion and the U.K.-based Broadgate Office Complex for $1.7 billion, was the only firm to close more than one billion-dollar-plus deal in 2009, according to Thomson Reuters.
However, several elements—political, economic and other—could serve to boost LBO activity in early 2010.
Tax cuts enacted during Bush Administration are set to expire at the end of 2010. Among these, the capital gains tax will likely revert to its historic 20% rate, up from 15 percent. Anticipation of that tax increase has already served as an incentive for business owners considering a sale somewhere down the line to push that date forward.
“We concluded a deal [in late 2008] with a seller who made it abundantly clear his number-one motivating factor [for selling] was that he was petrified of capital gains increasing when Obama won,” says David Panton, a partner and co-founder of Atlanta-based buyout shop
A longer version of this story appeared in Buyouts, an affiliate publication of PE Week.