October - 2006  

Mirus in the News

  • David Hoffer will be Speaking at the MIT Sloan CFO Summit on November 17th at the Newton Marriott. To receive a $200 Registration discount for this event, enter "Mirus" in the "How'd You Hear About This" Tab.

  • Mirus Capital Advisors Earns Strong Rankings in 18-Month Study of Tech M&A Banking Activity. To read this Press Release, please click here.

Market Overview

 

Consumer spending and sentiment remain robust, helping push the DJIA past 12,000 in intraday trading on Wednesday before it closed at a record high of 11,992.68. The market continues to move toward 12,000 as investors are increasingly optimistic about corporate earnings and economic data indicates a decrease in inflationary pressure.

 

On their face, retail sales for September disappointed, falling 0.4 percent in contrast to Wall Street expectations of a 0.2 percent increase. However, excluding gasoline sales, which fell a record 9.3 percent on significant price reductions since August’s highs, retail sales were up 0.6 percent. In addition, the University of Michigan’s mid-month index on consumer sentiment for October far surpassed economists’ expectations of 86.5,  increasing to 92.3 from 85.4 in September. 

 

These positive indicators and continued growth of the economy have tempered expectations for a rate reduction from the Federal Reserve and stirred discussion of a possible rate increase.  Market watchers are not the only ones unsure of the Fed’s future actions. The President of the Federal Reserve Bank of Chicago, Michael Moskow, recently warned that core inflation was “too high” and as a result “some additional firming of policy may yet be necessary”.  However, William Poole, Federal Reserve Bank of St. Louis President, in recent statements to Reuters, saw more risk to growth than prices and stated he would back an interest rate cut if the economy stumbled.

 

M&A Overview

 

Private equity fundraising continues unabated, as Private Equity Intelligence has recorded 436 new funds, raising a record $300 billion worldwide as of early October 2006. Fundraising is being fueled in part by increasing deal size, as seven of the ten all-time largest buyouts have been announced in 2006. That list has the potential to grow as Apollo Management and Texas Pacific Group’s proposed acquisition of Harrah’s Entertainment Inc. values the company at $26 billion.

 

In contrast, venture capital fundraising has begun to fall off after peaking at $13.4 billion in the second quarter, the highest fund raising total since early 2001. In the three months ending September, venture capital fundraising reached its lowest levels in more than two years. According to Thomson Financial and the NVCA, in the third quarter venture capitalists raised $4.9 billion, representing a 13 percent decrease from the same time last year.  The slowdown has apparently come as venture capitalists feel they have enough capital to fund investments for the near term and coincides with a difficult IPO market, long a lucrative exit scenario for VC-backed companies. Although there have been some recent highlights, such as SAIC’s recent $1.3 billion offering, the IPO market has become increasingly tough, as shown by the cancellation or postponement of three planned IPOs late last week, continuing a trend that has seen 51 offerings worth $10.8 billion canceled in 2006, compared with 45 companies’ offerings worth $6.3 billion in 2005, according to Dealogic.


This month’s metric is focused on the relationship between a company’s business focus and revenues at the time of being acquired and the respective valuation multiples paid by acquirers.  As illustrated in the Exhibit above, data on U.S. acquisitions over the last 12 months shows that multiples for companies in software and business services tend to increase along with the target’s revenues.  In contrast, industrial products companies show mixed results. 

 

The data suggests that software and business services companies tend to be more valuable as they reach key revenue growth milestones.  This effect is more pronounced in software companies, as their business models are usually more scalable than those of companies in business services.  Larger targets in these industrial categories tend to have proven business models which can be effectively scaled while maintaining or enhancing profitability.

 

On the other hand, industrial products companies show a mixed relationship between revenues and valuations, as the latter are driven by multiple factors in addition to revenues alone, such as profitability, synergy opportunities and operational complexity.  These factors become even more critical in the post-merger integration phase, as the complexity of larger industrial products targets tends to curb the realization potential of theoretical synergies and profitability enhancements which are key determinants of valuation multiples.






For background information about methodology and definitions, please click here. 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 senior bankers directly at:

Sources: CapitalIQ and Mirus analysis. Copyright 2006, Mirus Capital Advisors, Inc.  All rights reserved. Mirus Capital Advisors does not assume any liability for errors or omissions.


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