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Market Overview
Recent corporate earnings announcements from companies such as General Electric (47% decline in Q4 earnings) and State Street ($800 million in earnings charges in Q4, and $9.1 billion in unrealized losses on its books) have roiled the markets and helped usher in a return of the market volatility that peaked in late November. Citigroup’s reorganization plan and the economic stimulus package currently working its way through Congress have also helped the increase of market volatility in the new year, as the Chicago Board Options Exchange's volatility index (VIX) is again on the rise. The VIX, or “fear index,” hit a high above 80 in late November and then began a return towards its historical teens to low twenties levels, hitting 38 in early January. However, recent corporate earnings announcements and continued job cuts have increased market volatility and driven the VIX back up to levels near 60.
Announcements of job cuts continue to increase, highlighted by the first job cuts in Microsoft’s history. According to the Labor Department, the number of Americans filing for first-time unemployment benefits rose last week to a 26-year high, 589,000, for the week ended Jan. 17. The last time jobless claims were this high was in November 1982, when jobless claims surged to 612,000. The number of people continuing to collect unemployment insurance for one week or more rose by 97,000 to 4.61 million in the week ended Jan. 10, the most recent data available. A year ago, it was at 2.68 million.
Despite the grim economic news hitting the headlines on a daily basis, U.S. consumer confidence rose slightly in January, as the Reuters/University of Michigan Surveys of Consumers said its preliminary index reading rose to 61.9 from December's 60.1, ahead of economists' expectations of 59.0. Still, expectations remain of a long and prolonged recession, with one-year inflation expectations reaching just 2%.
Deal Overview
Recent reports have finally put some numbers to the truth that has been evident for several months - that venture capital fundraising and investing dropped in the fourth quarter of 2008. According to Thomson Reuters and the National Venture Capital Association (NVCA) forty-three venture capital funds raised $3.4 billion in the fourth quarter of 2008, a significant decline from both Q3 2008 ($8.4 billion) and the same quarter in 2007 ($11.7 billion). For the full-year period, fundraising totaled $28.0 billion from 211 funds, a 21.4% decrease in volume from 2007.
Additionally, Dow Jones VentureSource statistics show venture capital investment in U.S. companies continued to decline in the fourth quarter of 2008 with 554 deals garnering $5.5 billion, the lowest quarterly investment the industry has seen in three years. The Q4 totals represent a decline of 30% from the $7.9 billion invested in 718 deals during the same period in 2007. In total, 2008 saw 2,550 deals completed and $28.8 billion in venture capital invested in U.S. companies, down 8% from 2007 when $31.4 billion was invested in 2,823 deals. New England placed a distant second to California’s $14.6 billion invested, attracting $3.4 billion in venture capital with 328 deals - 19% less than 2007, when $4.2 billion was put into 377 deals.
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The Exhibit illustrates M&A transaction volumes since 2000. After the M&A market peaked in 1999 and 2000, transaction volumes more than halved to the bottom of the cycle in mid-2002. Since the most recent peak in the middle of 2007, the M&A market has dropped by 33% to just over 2,000 deals per quarter. Transaction volume in November 2008 was the lowest for a single month since the 9/11 terrorist attacks in 2001.
The credit markets were a key factor in the decline of M&A volumes: as debt financing has become more expensive and harder to find since June 2007, financial sponsors have become less competitive and closed fewer transactions. Fewer LBOs combined with declining public company valuations has put downward pressure on M&A valuations, causing some potential sellers to walk away from pending deals or stay out of the market entirely.
Mirus is seeing several forces at work supporting the M&A environment in 2009. First, the credit markets are slowly unfreezing (the first signs are visible in the commercial paper market), which will allow for a cautious return of financial buyers. Second, many companies that took on too much debt in 2006 and 2007, or which have significant exposure to a downturn in consumer spending, will be forced by their circumstances to seek a transaction. Third, many strategic buyers, having enjoyed strong profits from 2005 through late 2008, have strong balance sheets and are increasingly pursuing strategic acquisition programs.
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Founded in 1987, Mirus Capital Advisors is a middle-market investment bank that specializes in merger advisory, capital-raising services, fairness opinions and valuations to entrepreneurs, corporations and professional investors. By combining a proven process, industry and transactional expertise, and personalized service, Mirus has completed hundreds of transactions for both public and private companies.
Our affiliate Mirus Securities, Inc. is a registered broker-dealer and FINRA/SIPC member.
For background information about methodology and definitions, please click here. For any questions about the Mirus Middle Market Monitor or Mirus Capital Advisors, please contact us at 781-418-5900 or visit www.merger.com. You can also contact our senior bankers directly:
° Jamie Grant, Partner, grant@merger.com or 781-418-5928
° David Hoffer, Partner, hoffer@merger.com or 781-418-5922
° Peter Alternative, Partner, alternative@merger.com or 781-418-5943
° Don Richards, Partner, richards@merger.com or 781-418-5961
Sources: CapitalIQ and Mirus analysis. Copyright 2009, Mirus Capital Advisors, Inc. All rights reserved. Mirus Capital Advisors does not assume any liability for errors or omissions.
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