Reflecting worries about the ongoing credit crunch and the prospect of a full-blown recession, middle-market players were fairly dour at the year’s halfway point, according to the ACG/Thomson Reuters Midyear 2008 Dealmakers Survey.
When asked to characterize the current environment for M&A activity, just under half, or 49 percent, chose the designation “fair,” while 39 percent went so far as to say things looked “good.” Eight percent of respondents answered “poor.” The remaining 4 percent were an optimistic elite, classifying business opportunities as “excellent.”
The results reflect a continued souring in the industry’s mood in the past year. At the midpoint of 2007, 93 percent of respondents believed the environment was good or excellent, compared to just 43 percent now. The sequential decline over the last six months was also dramatic: 72 percent checked good or excellent in December.
The survey, conducted in June, was based on 542 entries. The group polled included private equity, venture capital and buyout firm members, 21 percent; investment bankers, intermediaries, brokers, 28 percent; lenders, finance providers, 10 percent; corporate professionals, entrepreneurs, 15 percent; and service providers, such as lawyers and accountants, 26 percent. The majority of respondents- 453 of the total 542 – are based in the United States but executives from 21 other countries were represented as well.
Deal pace for the next six months is expected to be sluggish but not stagnant, the survey found. This suggests sentiment that the market may be closing in on a bottom. Thirty-nine percent of the respondents expect the pace of M&A transactions to remain roughly the same, while 29 percent see a modest increase and 23 percent expect a modest slowdown.
Adding together the percentages of those who expect a modest increase (29 percent) and those who see a significant boost (3 percent) suggests that a third of respondents see things picking up in the final six months of the year, a rise from only 25 percent at the end of 2007.
Two thirds of respondents—68 percent—said they believe current conditions reflect a buyer’s market. This marks a telling switch from a year ago when 75 percent said it was a seller’s market. The trend was in keeping with December’s divided results, when 39 percent voted buyer’s market and 33 percent said seller’s market.
Of what deals will come, the hot areas look to be technology, chosen by 15 percent of the group as the sector that will experience the most M&A activity; energy, picked by 20 percent; financial services, selected by 17 percent; and manufacturing and distribution, checked by 13 percent of respondents.
The consensus is that the energy sector is the poised for a strong run during the next six months. 40 percent of the respondents said they expect the most organic growth for this period to come from the energy sector. This was well ahead of 25 percent who selected the healthcare/life sciences sector, 11 percent who picked technology and 10 percent who chose business services.
“The energy sector is poised for significant organic growth due to the current state of oil and energy prices,” commented one respondent. “The potential is huge, especially for the natural gas sub-sector.”
As for the driving forces behind deals, 29 percent of respondents expect the M&A action for the next six months to take its cue frominterest in distressed deals. Among the other forces expected to most stoke activity: 25 percent of those polled cited good multiples for acquirers and 21 percent picked large capital reserves for some acquirers
Cross-border deals are expected to grow in importance for middle-market players, according to the survey, with 43 percent of respondents seeing more of an emphasis in this area at their firms in the next six months. Thirty-two percent saw such deals as having the same importance overall in the period. The areas expected to draw the most attention, if a firm did indeed expect to transact a cross-border deal in the next six months, were Western Europe, 59 percent; Canada, 38 percent; and China, 28 percent. Respondents were encouraged to check all geographies that would apply.
The biggest obstacle for M&A activity during the next six months is seen as, unsurprisingly, the weak economy, getting the vote of 45 percent of the respondents. This view aligned with what respondents felt were the biggest potential impediments to corporate growth in the next six months: 32 percent cited recession and 29 percent cited the credit crunch. Concerns about inflation and energy prices were also represented, getting responses of 12 percent and 18 percent respectively.
“Fear of recession resulting from the credit crunch, energy costs and inflationary pressures associated with loose monetary policy and trade imbalances,” commented one respondent about potential impediments to corporate growth in the last half of 2008. “It’s an uncertainty born of not one, but many factors.”