|
|
Market Overview
Volatility in the US and international markets continues, in sharp contrast to the relative calm that had marked the recent bull market. In the past several days, subprime lending woes have served as a drag on the market, contributing to Tuesday’s selloff, which represented Wall Street’s second-largest point drop in the past four years. The decline comes on the heels of the recent 416-point plunge in DJIA, the largest drop in the last four years, sparked in part by concerns over a slowing US economy (with fourth quarter GDP growth revised downward to a 2.2% annual rate) and weakness in the housing markets. Compounding the economic concerns that contributed to the selloff was the unraveling of many yen carry trades, as the yen gained ground against the dollar and investors exited positions to cover their carry trade bets.
Recent economic data, coupled with former Federal Reserve Chairman Alan Greenspan’s comments on the possibility of a recession, helped contribute to concerns about future US economic performance. According to the Federal Reserve, although most of the country saw modest economic growth in the past month, there was some sluggishness in certain areas, with New York, St. Louis, Boston and Dallas mentioning some form of “deceleration” or “softening” in area activity. In addition, the US Commerce Department released data showing sales at retailers rose a less-than-expected 0.1% in February, raising concerns about cooling consumer spending. Investors had expected an increase of 0.3% from January. According to Thomson Financial, 60% of merchants missed their February same-store sales estimates.
M&A Overview
Activist shareholders have been making headlines in the deal world recently, with several deals being affected by valuation concerns at the board or shareholder level. The Topps Co. board is at odds over a $385 million buyout offer from Madison Dearborn Partners and Tornante Co., Michael Eisner’s private investment company. Directors associated with hedge funds Crescendo Partners and Pembridge Capital Management have voiced opposition to the deal, saying the offer undervalues the company and vowing to solicit shareholder support to reject the deal. In addition, several of Nikko Cordial’s top shareholders voiced concern, despite management approval, over the valuation proposed by Citigroup in its $10.8 billion buyout offer. In response the Company has raised the offer to up to $13.35 billion and announced it will launch a tender offer.
|
|
This month’s metric looks at the relationship between valuation multiples paid by acquirers and the profitability of software, business services and industrial targets. Analysis of the last twelve months of merger and acquisitions data in the United States, which is illustrated in the Exhibit above, shows that profitability and cash flow ultimately drive valuations.
There is a positive correlation between EBITDA margins and valuation multiples across all industries, as companies that are more profitable command higher valuations. While profitability is usually a key driver of M&A valuations, in practice Mirus has found that buyers will often be cautious of companies with extremely high profitability. EBITDA margins of 40% or higher are often scrutinized for longer-term sustainability.
Data also suggests that software companies command higher valuations than companies in other industry groups, as they are more scalable and thus adept to profitable growth. Size is another factor driving higher valuations multiples of software companies, as they tend to be smaller than business services and industrial firms at the time of acquisition (refer to the black circles in the Exhibit). The growth potential and scalability of software companies tends to offset the negative effect of their smaller size, resulting in higher 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.
|
|
| |
