Recap of 2005 M&A
The end of 2005 marked the second consecutive year of solid M&A activity. The value of ’05 transactions totaled $2.14 trillion, the highest since the 2000 high water mark. We tracked 6,528 middle-market transactions, up from the 6,381(1) of the previous year. In the Association for Corporate Growth’s (ACG) survey of 1,800 dealmakers across the country, 91% of dealmakers viewed the M&A environment as good or excellent vs. 72% and 45% in 2005 and 2004 respectively.
Valuations continued to rise with median price-to-EBITDA multiples across all deals increasing from 8.3 in 2004 to 9.0 in 2005. For those business owners that missed the last exit window in 2000, it is certainly a good time to explore the sale of a business.
In Mirus’ 2005 Preview from January last year I outlined seven reasons why 2005 would be a great year for M&A, each of which came to fruition. However, with the benefit of retrospect, it looks like I missed two additional factors:
- Cross-border deals: Of the estimated 8,400 US transactions announced last year, we tracked approximately 1,700 transactions from foreign buyers, representing just over 20% of total deals last year. A weak US dollar and a strong US economy have led many foreign buyers to the US for relatively inexpensive deals with much larger market opportunity. We expect this trend to continue in 2006.
- Sarbanes-Oxley: The additional burden placed on companies by Sarbanes has prompted investors and management teams to turn increasingly to M&A for their exit needs. Despite relatively healthy financial markets, only 193 companies went public last year. Over the past five years we have averaged 134 per year. To put this in perspective, we averaged about 550 IPOs per year in the 1990s.
2006 Preview
We believe that M&A will be broad-based, with companies in a wide range of industries turning to M&A for exit and growth needs in 2006. We believe that all of the factors that we laid out for 2005 are largely at work and will lead to another solid year in M&A. The US economy is strong despite some formidable obstacles in 2005 like Katrina and Iraq. Middle market companies continue to show strong growth. Strategic buyers are active and competing with financial buyers. Competition for deals and a great lending environment continues to drive relatively high valuations. Cross-border transactions will continue to be driven by a favorable currency environment for foreign buyers.
At the moment, we see only two caveats to our optimism. First, if economic optimism falters, lenders will withdraw quickly from highly leveraged deals, resulting in lower valuations and lower overall M&A activity. Second, we have heard sporadic complaints from large private equity firms that the number of deals is high but the quality of deals has fallen over the past six months. If this is the case, we may see fewer private equity deals.
We anticipate that several markets will continue to lead middle-market M&A activity in 2006 including: software companies, particularly those companies that provide security software, multi-tenant hosted vertical market software and marketing-oriented software; new media; web-based subscription and services companies, and technology-enabled services companies across a variety of vertical markets.
Elliot Williams
President, Mirus Capital Advisors
PS. Mirus launched its new website earlier this year - check it out at www.merger.com and let me know what you think at williams@merger.com.
(1) Note that Mirus changed to CapitalIQ as its data provider during 2005, which explains why the (recalculated) numbers of transactions prior to 2005 included in this edition of the Monitor are slightly different from the numbers included in last year's January edition.
