Update: M&A Landscape Q1 2012

2011 was an interesting period for M&A. The first half of the year saw the bulk of activity, with total global deal volume of about $1.27 trillion, benefitting from a better credit outlook and accelerating economic recovery. The second half of 2011 slowed down for just $875 billion according to Bloomberg, with an overall y-o-y deal volume growth of about 9%. European debt worries and macroeconomic issues, like the natural disaster in Japan, were contributing impediments. Despite these hurdles, however, 2011 was a fairly strong year for M&A.

Where does this leave us for 2012? There is a lot to consider, but the overall outlook is for another robust year. The biggest challenge currently, and one that U.S. firms are monitoring closely, is the European debt crisis, which poses some systemic concerns for the coming year. European problems could become American problems if Europe falls into a recession. U.S. exports are not currently growing, and a European downturn could exacerbate this if demand for U.S. products drops. Higher oil prices are another factor which is holding the U.S. back from stronger GDP growth. Q4 2011 alone saw crude oil prices jump nearly 25% over the previous quarter. Turbulence in producing countries like Libya and increasing demand in China and other emerging markets are the culprits.

The American housing market is still in a slump. Mortgage rates are extremely low but potential buyers are wary of further drops in home value. There are still a lot of inexpensive homes on the market which means less new construction. One piece of good news here is that foreclosure saw a sharp decline last year. Unemployment is another headline issue for the U.S. economy. While joblessness seems to be improving at a modest rate, underemployment is actually increasing according to Gallup, showing that more people have given up looking for work or have taken substandard positions. Faltering job growth has been a persistent remnant of the fading recession. We are still experiencing unemployment over 8% after 10 consecutive quarters of GDP growth.

But don’t be put off by these difficulties. There is plenty to be enthusiastic about, and 2012 looks to be busy for M&A. To begin with, there is upwards of $500 billion in dry powder that is expiring soon, so financial sponsors should be chasing targets very aggressively. Lending markets are looking more attractive, as well, particularly for larger firms with lower risk profiles. Cash is available. 2011 also saw better U.S. real GDP growth rates with each passing quarter. Q4 ended with the fastest growth rate since early 2010. And consumer spending (one the chief drivers of our economy) jumped to 4.4% growth over 2.7% in Q3. This is the fastest pace in over five years. Manufacturing is picking up speed and U.S. economic recovery is accelerating. Prospects in the middle market are particularly promising, and this is where the action is. The lower middle market is most active. 79.5% of middle market deals in 2011 were under $100 million. Most of these deals are being done in cash. Total enterprise value to trailing 12 month EBITDA ratios are also on the rise in the middle market: averaging 7.6 in 2009, 8.6 in 2010, and 9.2 last year. Higher valuations are coming in the wake of higher corporate cash reserves, suppressed interest rates, and more M&A activity. The middle market is particularly active in the private equity segment, as well. In the first half of 2011, 75% of deals in PE were valued under $250 million. Deals under $500 million made up nearly 80% of deal flow for the year. Much of the deal-making here is in acquisitive growth (making up as much as 50% of PE acquisition in 2011). Business products and services was the most active industry segment for private equity, while the energy sector saw a drawdown, particularly in Q4.

Please feel free to review “M&A Outlook 2012”:
http://www.slideshare.net/ennovance/ma-outlook-2012

Chemical Industry Merger and Acquisition (M&A) Activity Gaining Momentum

In the first half of 2010, there has been a noticeable pickup in the level of M&A activity in the core chemicals industry. In fact, in the first half of 2010, there were more deals than there were in all of 2009; to date, there have been 23 closed deals in 2010 whereas 2009 saw only 20 deals for the whole year (and only 7 for the first half). In terms of actual value, the 23 deals in 2010 represent $29 billion whereas 2009 saw $25 billion in deals for the whole year. Median valuations multiples (i.e. EV/EBITDA multiple) are on the rise for deals within the industry this year, that is significantly higher than the 2009, 2008; however, actual transaction value remains lower than 2007. It seems that sellers are more focused in achieving their strategic objectives and buyer are more focused on the value (instead of multiples or price)....Everyone wins!!

Semiconductor industry (early in the supply chain) seems to experience a further gain along with the global manufacturing and chemical sectors’ continued advancement (at a slower pace). Housing and job growth was disappointing and employment recovery may take a very long time. On the other hand, inventory rebuilding of manufactured product is moving into a moderate growth phase. All of these data coincide with the major upswing in reported second quarter revenues and profits across the industry.

Not only has there been an increase in the number of deals, but they have been more focused towards smaller-scale transactions as opposed to large, transformative deals. This can be attributed to several factors, among which include the European Union’s Reach legislation, an expected increase in the US capital gains tax, as well as banks’ predilection to favor smaller deals that focus on add-on acquisitions as opposed to massive transformations. Furthermore, a good deal of M&A activity has been conducted by financial buyers as opposed to major industry players; in the first quarter of 2010, financial buyers accounted for only 6% of the M&A dollar value, which has since risen to 48% in the second quarter.

So, what does all this information mean for the industry as a whole and how can investors capitalize on these conditions? In terms of the chemicals industry, these figures convey a strong underlying value and demonstrate the beginnings of a vibrant recovery for the industry. Furthermore, in terms of capitalizing on investments, the data indicates that the market is leaning towards smaller, operational value-adding deals for numerous reasons, and it is an ideal time for investors to take advantage of this new, and probably lasting, development in a recovering market.

1H-2010 M&A Update Slide Link: http://www.slideshare.net/ennovance

Opportunity for bargain hunters to make acquisitions (chemical business)!

In 2007, we could not have enough of chemical deal news, but current economic condition, lack of visibility in the future, plunge in profits and demand, distressed credit markets are putting frigidity on M&A deals. The deal value in 2008 was down compare to 2007, only $45 billion and Akzo/ICI being $16 Billion. We are seeing many distressed deals, while some companies are forced to consider selling assets to raise needed cash such as Chemtura, or bankruptcy of Merisant. Restructuring will likely bring more assets to market and the gap between seller and buyer expectations has became more interesting/realistic as market conditions have rapidly changed (EBITDA multiples have come down by 2-4X). The slowdown in the economy and in chemical demand is expected to continue, further deteriorating company profits. The challenging economic condition may force companies to focus on the core business and perhaps selling non-core assets. There are a lot of opportunities for private equity players like Ennovance Capital that is “sector focused, operation oriented” (Scratching beneath the surface is a good way to find good opportunities). In current depressed lending markets, Ennovance is very active in sourcing/closing and willing to be flexible with transaction structures and overcome credit shortfalls. On the other hand, most traditional PE firms are on the sideline because of their inability to understand the business operation and inaccessibility of easy credit.

Similar to other historic down cycles (stronger companies are beating the weaker competitions), we expect more consolidations, portfolio adjustments and change of ownerships in chemical industry. Sub-sectors like pharmaceuticals, petrochemicals, agrochemicals (… just a few to name) are expected to consolidate further! M&A strategies for this down cycle are critical to improve scale or cost position, provide technology, or open access to new or emerging markets, or conversion of business model as well as to implement divestitures of businesses that drag on performance. This cycle offers a great opportunity for entrepreneurial and capable operating executives who pose the nerve to invest their own money and fortitude to collaborate with others to access additional/required capitals.
While the total number (and total value) of chemical transactions are expected to be low in 2009, the deal activities are expected to pick up in coming quarters (… fire-sale if economy continue to deteriorate).

I believe, there has not been a better time (at least in the past 10+ yrs) for bargain hunters to make acquisitions! Do we have the will-power to cease the moment?