Optimism is scarce in the middle market, according to the ACG-Thomson Reuters Year-End 2008 Dealmakers Survey, which found more than eight out of 10 respondents classifying the M&A environment either as fair or poor.
There was, however, a feeling among private equity respondents that the debt markets were likely to improve somewhat over the next six months, if only because the consensus seems to be that they can’t get any worse.
The outlook for the next six months was predictably dreary. When respondents were asked for an assessment of the M&A environment by June 2009, 44% of those surveyed said they expect it to be worse, 31% said about the same, and only 24% see better days ahead.
“The macro-economic environment has to get better,” says Mark Jones, a partner with Chattanooga, Tenn.-based middle-market shop
The survey, conducted in November, polled 970 middle-market participants, including investment bankers, corporate development officers, lawyers, accountants, business consultants and buyout professionals. All but about 50 of those polled were from the United States.
Fueling the pessimistic view, which was the most negative in the survey’s five-year history, was concern about the ongoing impact of the credit crunch and, by extension, the overall economy. For example, 40% percent of all respondents to the survey viewed the credit crunch as the biggest potential impediment to corporate growth over the next six months.
The 2007 year-end survey found that 72% thought the M&A environment was good or excellent, compared to only 14% in the current survey.
“PE firms are still sitting on huge piles of dry powder and they’re yearning to use it,” says Dennis White, a partner with law firm McDermott Will & Emery and ACG vice chairman. “What they need now is a pickup in financing. At this point, the [financing] river isn’t frozen solid, but we’re still very early in the thawing process.”
Worldwide M&A deals in the middle market fell 16% year-over-year to $569.6 billion through the first three quarters of 2008, according to Thomson Reuters (publisher of PE Week). The volume of all M&A worldwide totaled $2.4 trillion in announced deals through the third quarter, down 28% from 2007’s historic levels for the same period.
But one driver for a pickup in M&A activity could be the overwhelming view that the current M&A environment represents a buyer’s market. A resounding 81% of all respondents held this opinion against only 1% who viewed it as a seller’s market, while 17% percent weren’t sure.
That attitude provides at least a partial explanation of the relative logjam in dealmaking. Beyond the tight lending market, there is also a feeling that sellers have yet to adjust their expectations to the new reality of the marketplace.
“There’s always a lag effect between buyer and seller expectations,” Jones says. “There’s still an element of coming to grips with how things have changed.”
And even if sellers adjust, there’s the question of whether buyout shops can really make a decent return without ample supplies of leverage.