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For background information about methodology and definitions, please click here.
M&A 2004 Recap and 2005 Preview
Coming off of the busiest December in M&A history ($283 billion in value!), 2005 certainly looks promising. All of the trends that chilled M&A activity in 2002 and 2003 turned positive during 2004. The past year marked the second consecutive increase in the number of closed middle-market transactions with 6,625 transactions closed in 2004 (see Metric of the Month below for a five-year historical overview). In a recent survey by the Association for Corporate Growth (ACG) of over 1,800 dealmakers, 72% of dealmakers viewed the M&A environment as good or excellent vs. 45% a year ago.
Anecdotal evidence further supports our positive outlook. Mirus has seen increased activity in recent months across all of our franchises (business services, software, industrial, and family firms) and we’ve gotten similar feedback from other M&A professionals in our network.
We expect 2005 activity to continue to grow based on a handful of positive trends including:
- Stable economy and financial markets. The expectation for rapid capital appreciation has been wrung out of the market. A stable economy and stock market in 2005 will result in continued growth in M&A activity and deal values.
- Growth in the middle market. We are seeing an increasing number of growing and profitable middle market companies. There are many more attractive targets out there than even 18 months ago.
- Deals beget deals. Middle-market activity is usually preceded by mega-deals in the public market. Q4 of 2004 reached 2000 levels for large M&A and we expect to see middle-market deal activity to follow suit.
- Cooperative lending environment. Low interest rates and more aggressive lending are supporting increased buy-out activity.
- The valuation gap is closing. The post-bubble expectations have moderated and actual valuations have improved. We expect this trend to continue into 2005.
- Pent-up demand from buyers and sellers. Sellers stepped back from M&A in 2001 and stood on the sidelines waiting for valuations to improve. Likewise, many buyers looked inward during the recession to focus on profitability from core operations. Now the buyers are back with a renewed focus on growth.
- Leveraged buy-out activity is up. Private Equity Groups accounted for 15% of acquisitions in 2004. They are flush with capital and are paying competitive prices.
Elliot Williams
President
Mirus Capital Advisors
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The metric of the month in this issue provides a historical overview of middle-market M&A activity over the last five years. Clearly, activity has increased year-on-year since 2002, though activity levels are still below the peak of 2000. As discussed in the Market Brief above, Mirus anticipates that M&A activity will continue to strengthen in 2005.
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December of 2004 saw continued strength among middle-market public companies, with the “small caps” outperforming the major indices by a wide margin (Russell 2000 up 17.0%, Wilshire 5000 up 10.9%). Gains were broad based with prices up across most industry segments.
Demand for business services is particularly booming, as demonstrated by the strong relative share price performance of this segment. In a recent Mirus Capital Advisors survey of publicly-traded business services companies, we found that growth rates have increased significantly in 2004 to 33% up from a three-year average of 13%. Growth rates among Internet service companies were over 50%.
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Business Services: 2004 marked the return of M&A activity to a wide variety of industry sectors. Several industries that generated very little activity from 2001-2003 made a slow, steady comeback in 2004 including business services such as staffing, IT services and consulting. Other business service segments exploded with M&A activity in 2004 including database management and information retrieval. Companies that own and analyze unique information about consumers, companies, activity, behavior, demographics are in high demand. Mirus counted 326 transactions in this area in 2004, and including our own engagements in data analytics and document archiving & retrieval last year.
Software: Mega mergers are back, with two of the largest software mergers in history reported in Q4 with Symantec continuing its buying spree acquiring Veritas for $13.5 billion and Oracle finally consummating the purchase of PeopleSoft for $10.3 billion. With Symantec’s purchase of Veritas, any remaining questions regarding the company’s commitment to the enterprise are moot. Also in the infrastructure management space was EMC’s acquisition of System Management ARTS (SMARTS). With its robust, patent-protected IP, SMARTS furthers EMC’s strategy in infrastructure management.
Industrials and Family Firms: M&A Activity for middle-market Industrials was up slightly in December, the best month of the quarter, with 20 of the 113 December transactions coming from the food & beverage sector. Overall, M&A among Industrial companies was up in 2004, due in part to consolidation among capital equipment makers (225 transactions) and electronics manufacturers (144), and a strong resurgence in the LBO market. Leveraged buy-out activity in Q3 eclipsed the record levels seen in 1997, contributing to the significant growth in LBO volume in 2004.
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For any questions about the Middle Market Monitor or Mirus Capital Advisors, please contact Mirus Capital Advisors at 781-418-5900 or visit www.merger.com. You can also contact our partners directly at:
Sources: Thomson Financial (SDC), OneSource and Mirus analysis. Copyright 2005, Mirus Capital Advisors, Inc. All rights reserved. Mirus Capital Advisors does not assume any liability for errors or omissions.
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