More Upside for New England M&A Market

In September 2006, I spoke at the ACG Boston Breakfast Series. There were over 300 people in the room, and my message was simple: “Tell your clients if they are thinking about doing a strategic deal or financing, do it now.” The transaction market had been rallying for several years, multiples were full, and confidence was high. It was also clear conditions weren’t going to last.

Today I work with a team of M&A bankers at Benning Associates (http://benningLLC.com), based in Kendall Square. Our Firm’s current market view is more tempered, but optimistic: There is more upside for the New England M&A market.

The New England M&A market has recently seen 25-30 deals announced deals each month – roughly 2/3 of long-term averages. There have been a number of VC-backed exits and divestitures, but relatively few high-quality private company sales. Simply put, demand significantly exceeds supply.

The graph below shows indexed M&A announcements between 2006-2011, for New England and the United States as a whole.

The lower middle market (sub-$100MM) held up into 2008, well after the sub-prime crisis and shutdown of leveraged finance. Also, in 2009-2010 New England had more relative transaction activity, due to regional industry mix, large healthcare and software/services sectors, and a solid base of VC-backed companies.

Healthcare will continue to be an area of interest for acquirors for simple reasons: Sheer market size, trends in demographics and chronic disease, regulatory change and cost control mandates. These will drive large, high growth, profitable investment opportunities. Click here for a link to a recent Benning Associates presentation on Med-Tech and Healthcare IT deal drivers.

The leveraged finance market for target companies with $10MM+ of EBITDA is hot again, and term sheets for sponsor-backed $5MM+ target companies are very competitive. There is significant dry powder in PE funds, and they are raising more capital in anticipation of increased opportunities. As PE investors figure out ways to address current owners’ financial goals, we will see a significant uptick in PE deals involving New England private companies.

The lower middle market is still a challenging one to get deals done in. In particular, for smaller companies, with more concentrated risks, the economic recovery is still unpredictable – and potential volatility in operating results is weighing on valuation and structuring discussions. The good news is that most trends are generally “up and to the right” for the foreseeable future – so deals that get sidetracked today, have a good chance of coming back together, if counterparties handle discussions properly.