Our analysis of reported transaction volumes for the lower end of the middle market (under $25 million in transaction value), show that the number of deals was down over 25% in 2008 versus 2007, a trend that accelerated in the 3rd and 4th quarters as volumes dropped precipitously.
Interestingly, despite early indications, median valuations for both periods stayed stable at about 4.6 times EBITDA, in each case peaking in the second quarter of the year, but in 2008, falling somewhat in the second half of the year.
Source: Pratt's Stats
Looking at slightly larger transactions, GF Data Resources' Middle Market M&A Valuation Report for the fourth quarter of 2008 indicated that valuations remained in line with quarterly averages dating back to mid-2007, however, debt levels fell sharply, a result of the tightening credit markets and the lack of available cash needed to finance these deals.
"Total debt and senior debt declined dramatically, falling to 2.4x Adjusted EBITDA and 1.9x, respectively," Andrew Greenberg, GF Data Resources' CEO, noted. "Those number were 3.4x and 2.6x, respectively, in the third quarter, and averaged 3.4x and 2.5x respectively for the first half of 2008. As a result of declining debt levels, average equity contributions [by private equity investors] soared to 59.9 percent, up almost 20 percentage points from the third quarter of 2007."
