Email Response to Mergers and Acquistions 2009

Email Response to Mergers and Acquisitions 2009

Below is an email response to my Blog about Mergers & Acquisitions in 2009 from a friend of mine who works at the investment group at a major bank. I respect his opinion and his insightful point of view. See if you agree.

Hey Rob,

I like the Blog – interesting read. Below are my thoughts on your M&A assumptions:

"1. We are in the bottom of the market (12/2008)" – Mildly agree, but I think we will see a number of significant corporate failures that will shock the market intermittently in 2009.

A lot of LBO transactions and leveraged acquisitions, particularly those completed in late 2006 and 2007 will experience difficulty in 2009 given declining EBITDA’s and covenant levels starting to ratchet down. These Company’s will not be able to refinance and will default as a result.

"2. The market/economy will recover in second half of 2009 or 1st half 2010" – I think any semblance of a recovery will not occur until 2010. While interest rates are near historic lows, it may not be sufficient to stimulate growth in 2009, given increasing unemployment rates, depressed house prices and most importantly weak consumer sentiment.

"3. Credit will remain tight through 2009" – Absolutely agree. When banks commence lending again it will be to larger investment grade companies. For lower rated, smaller, more levered companies it will be difficult to complete acquisitions that are EPS accretive given the high financing costs.

"4. Mergers & Acquisitions will be driven by companies with cash and those Companies will use that cash to buy cheap companies in their industry" – Agree.

Company's that have strong liquidity positions (balance sheet cash and capacity under their revolving credit facilities) will be in a strong position to acquire companies at depressed multiples.

"5. Premiums of at least 30% will have to be paid for the purchase of companies." - I would agree that premiums will be in the 30% area. With valuation multiples nearing historic low, premiums will be higher that the historical average as a result.

I think we will see a lot on industry consolidation in 2009 with the big players making a number of strategic acquisitions. I think this will be most prevalent in the energy sector and tech & services.

The premiums paid will factor in cash on balance sheet as the EV/EBITDA multiple is calculated on a net debt basis.

Hope you have an enjoyable and peaceful Christmas.

Regards,

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