As hurricane season approaches, it is a great time to be introspective about the state of the merger and acquisition environment nationwide and in New England. While selected activities are signs for optimism in some sectors, the unsettled and stormy economic forces that we are experiencing suggest a cautious approach.
Nationwide, overall M&A activity YTD on a dollar value is down almost 40% from 2001. In comparison, the same statistic for middle market deal flow is down 22%, suggesting that the larger deals are falling out of favor. Nationwide, the number of transactions YTD are down 25% on a run-rate basis and the average deal size is down only 16%, suggesting that some larger deals are still getting done and that valuations are still being maintained. This last statistic is surprising as we are seeing a lot of bargain hunting in the marketplace with financial buyers outnumbering strategic buyers, and acquisitions occurring near cash value or out of bankruptcy. It will be interesting to see if the year-end numbers continue to support this trend. The factors contributing to the decrease in overall M&A activity include a tighter loan market, weaker public equities markets, large deals falling out of favor with investors, a higher level of deal scrutiny and overall concerns about the direction of the US economy.
Closer to home in New England, the number of M&A transactions decreased 32% in Q2 2002 from Q1 2001, consistent with the national trend. Disclosed deal value fell 66% over the same time frame, counter to the nationwide trend. While this last statistic may suggest concern, it is important to remember that New England quarterly numbers can be skewed by a drop-off in large deals given the smaller base of overall transactions. In fact there was only one disclosed deal greater than $100 million in value in Q2 2002 versus six in Q1 2001. It is interesting to note that we are seeing a number of deals occurring in the Internet software space as companies appear to be taking a “buy” versus “build in-house” approach to augment their technology platforms.
On a micro-economic level, Mercator continues to see strong interest for our M&A strategic advisory services with middle market technology companies. Current sell-side projects include a manufacturer of optical components and instruments and a manufacturer/distributor of energy efficiency lighting. We are also managing a strategic investment and a buy-side project in the capital equipment services sector.
Our look forward is that Q3 M&A activity will be soft, especially given the summer months, but we will see some pick-up in Q4, although still at lower than historical rates. Buyers will remain constricted by capital and while the larger deals will still be few and far between, we are starting to see some activity in this segment with deals such as the recently announced GE Commercial Finance acquisition of ABB’s financing unit and Hershey putting itself up for sale. LBOs also seem to be staging a return as companies such as TRW look to sell valuable assets to raise cash to service their debt. We also see a focus on shoring up core competencies that leverage strengths and consolidation opportunities that leverage operating efficiencies.
For the remainder of 2002 and into 2003, it is our belief that emerging and middle market deals will represent the best M&A opportunities and value. Lets all hope that today’s environment is not the calm before the storm or that we are caught in the eye of the hurricane.
