M&A Market Conditions

August 2002

The Merger and Acquisition market is experiencing:

• Tight credit
  
  
• Declining earnings in many industries
  
  
• Depressed stock prices
  
  
• Economic uncertainties
  

Fewer owners are making the decision to sell because:

• There is a reluctance to sell for less than the high multiples of a couple of years ago.
  
  
• Business is off and it’s better to sell with upward trends.
  
  
• Because of low interest rates and a down stock market, many owners believe they can’t afford to sell and retire.
  

There is a real need for quality companies with good earnings. Selling in the current market offers the owners of such companies a rare opportunity. The laws of supply and demand are dictating high multiples for excellent companies. The opportunities to reinvest high multiples received in a sale transaction in quality public companies whose stock prices have over corrected creates this rare opportunity.

Corporate and financial buyers are paying premiums for:

• Consumer products companies
  
  
• Manufacturing companies with proprietary product(s)
  
  
• Food brands
  

Smaller firms are sought as add-on acquisitions to a larger platform company. Larger firms, usually $50M or more in sales, are acquired as new platform companies.

Our April 2002 newsletter discussed recapitalizations “recaps” which allow the seller to cash out a portion of his/her investment while maintaining an ownership position. Here’s how they work. Suppose you have a business with good growth opportunities but you are at a point in your life where you would like to cash out a portion of the business. Possibly, you require liquidity for estate planning needs and diversification. Whatever the reason may be, you sell a portion of your business to a group who supplies the capital required to grow the company internally and/or through acquisitions while you continue to run the company.

These buyer groups prefer deals where management continues to run the company. They will, however, offer expertise in areas where they have greater strength. In some cases, the buyer group will acquire a control position and in others a minority position. In all cases, however, the objective is to grow the company well beyond where the owner could have done so alone and exit through the sale or IPO of a much larger company 5-10 years down the road.

Well-managed companies with good earnings are always in demand. It is certainly a plus if your company is in a growth industry or if you have a proprietary product. Our job is to create competition for your business.