22.11.10

2011 Private Company M&A: Market-Related Considerations

A current McKinsey & Company study articulates Four Core Principles of Corporate Finance for CEOs. We see relevant M&A-related insights for private company owners.

Four Core Principles: 1) Core-of-Value: Value equals return on invested capital and growth; 2) Conservation-of-Value: Only increasing cash flow increases value; 3) Expectations Treadmill: Demands for performance and growth are compounding; and 4) Best Owner: Businesses do not have inherent value – they have different values to different owners and investors.

Analyzing the 2010-2011 M&A market, Benning Associates sees these principles applying directly to transaction decisions for private company CEO/owners.

Most M&A transactions are in the $10MM-$100MM segment of the market, and on the sell-side are driven by “Best Owner” considerations of valuation and up-front liquidity – “It is worth more to me than you, and I’ll pay cash.” For private company owners contemplating liquidity, 2010 has been a significant improvement over 2009, and 2011 looks to be even better. Target companies in 2010 demonstrated core earnings and growth plans, and acquirors re-assessed investment needs and financial resources.

The charts below highlight sales of US-based private companies to either strategic acquirors or private equity investors. The first chart highlights the last 10yrs (2001-2010), and the second covers the 15 years beginning 1995 -- providing some interesting visual context for 2009-2010, inclusive of the 1999-2000 tech/internet spike.



70% of exits in this size range are in the consolidation-intensive technology, healthcare and business services sectors, where acquirors look for straightforward top-line or cost-cutting synergies – tying back to McKinsey’s value concepts. “If we buy this asset we can sell a lot of it.” “We can use this to sell a lot more of our core product.” Or “if we buy this, we can reduce manufacturing costs, cut duplicative SG&A, etc.”

On the buy-side, we expect these cash flow-oriented SCOPE and SCALE deal drivers to assert themselves strongly in 2011, where acquirors with cash reserves and funding resources seek to meet performance expectations.

In 2011 there will be continued upside momentum in valuations. Mean transaction size in the $10-100MM range in 2010 was $29MM, versus $32MM over a ten year period. Indexed dollar volume and number of deals usually track each other tightly, but there was divergence in 2008, as deal sizes dropped sharply. In 2011 with stabilized earnings and multiples, we expect these indices to re-converge, due to more quality sellers at higher prices.

So what’s the takeaway? For owner/CEOs contemplating M&A exits or liquidity, the bottom line is that valuation and cash gets deals done. In 2011, we expect acquiror fair value to more often exceed seller target prices – making acquirors the new “Best Owner” of many corporate assets. This valuation shift, plus improved acquiror financial resources and a relatively stable macroeconomic environment will enable a robust 2011 M&A market.

Transaction data source: Dealogic LLC
McKinsey Quarterly: http://www.mckinseyquarterly.com

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