The majority of private equity professionals believe that M&A activity will continue to rise in 2006, according to the bi-annual ACG/Thomson DealMaker’s Survey. A related survey found that 90% of investment bankers, private equity pros and corporate executives believe that the current environment for M&A and corporate growth is excellent or good, which represents a 5% rise over June 2005 results.
Driving the increased M&A appetite are four distinct factors, says Dennis White, a corporate attorney with McDermott, Will & Emery. First, costs associated with Sarbanes-Oxley have dampened private company enthusiasm for going public on U.S. exchanges. A small percentage of this drop-off is being absorbed by overseas exchanges like London’s AIM, but not nearly enough to handle the liquidity demand.
Second, banks continue to smile on those looking for acquisition-related financing, despite year-old worries that the pocketbook tightening is inevitable. Credit it to low interest rates, or perhaps to a relative lack of loans gone bad. Third, M&A valuations continue to rise, which converts many possible sellers into probable sellers.
Fourth, and perhaps most importantly, strategic buyers have come back in full force. This is particularly true in the technology sector, but also can be seen in manufacturing, healthcare and business services.
“A lot of companies did absolutely no acquiring for a period of around three years, and have woken up to realize that there are new technologies built around their core markets,” explained Elliott Williams, president and managing director of Mirus Capital Advisors. “Sometimes M&A can be the cost of staying competitive.”
Twenty-nine percent of 1,977 survey respondents expect the technology sector to experience the most merger activity in 2006. Nineteen percent said manufacturing and distribution, 18% said healthcare and life sciences, 11% said business services, 9% said financial services and 3% said retail. The 355 private equity respondents, however, ranked healthcare and life sciences first, with 33 percent. This was followed by tech (20%), business services (17%), financial services (9%), consumer products/services (8%), manufacturing and distribution (7%) and retail (2%).
In terms of where those deals will occur, nearly half of overall respondents expected to participate in cross-border deals in 2006, with Western Europe (46%) ranking ahead of both China (36%) and Canada (31%). That order remains intact in the private equity subset, with additional deals expected in the U.S. (13% of respondents were from outside the U.S.), India, Eastern Europe, Latin America, Japan, Russia, South American and the Middle East/Africa.