 In like a lion, out like a lamb
Although 2007 started off with a bang, the final months saw several mega-deals implode and a teetering of financing for those deals. The number of transactions reported certainly showed signs of slackening during the 4th quarter. According to SDC, middle market deals (ie $50 million to $500 million in transaction value) fell off about 4% percent year over year.
2008 M&A Forecast
We anticipate a major correction for mega-deals during 2008, and a minor correction in smaller deals. While financing has clearly gotten tighter, the Fed has been consistently been dropping rates- implying that credit will get cheaper in the coming quarters. Mega-deals will likely have significant trouble achieving the leverage levels they require- especially as the sub-prime fall out continues to take its toll on the major Wall Street banks.
That said, ample Private Equity remains committed to PE Groups as well as Hedge Funds- all of which require an investment vehicle to achieve necessary returns. Deal structures may alter somewhat, but capital is certainly available for investment.
Foreign Buyers
Although not new to domestic M&A , we anticipate foreign buyers will continue to play a bigger role in M&A deals. As with most things, there is clearly a trickle down effect with foreign buyers looking towards increasingly smaller deals as the availability of quality targets becomes ever more scarce. That said, we have already seen a great deal of foreign involvement - look no further than the capital injections to several of Wall Street's biggest names. More to the point for the middle-market, though, is the consistent trend of the weak dollar. With no foreseeable change in the exchange rate trend, foreign acquisitions of US companies remain increasingly viable.
The Big Unknowns
Notwithstanding the above, there remains several large question marks hanging over the M&A market. Namely, the effect of the sub-prime market on the greater market, the overall economic trend, and the impact of election year politics.
The Sub-prime Market Effect on M&A
With regards to the sub-prime market, we certainly anticipate that this will get far worse before better. The impact here is likely to be at the extreme ends of the market: the big Wall Street players will seek to conserve capital as they untangle various collateralized debt obligations (CDO's) and seek to define their ultimate loss exposure. This will certainly hurt the mega-deals. On the other far end of the spectrum (lower-middle market), private buyers that might seek to use real property as collateral to buy "micro" (sub-$10 million) businesses will find loans harder to come by.
The General Economy
The economy as a whole is certainly throwing off mixed signals. Unemployment claims remain fairly good, yet the wider markets are starting to show strong signs of disarray. Clearly the stronger the overall economy remains, the better the M&A markets will be.
Election Year Issues
With regards to election year issues, we are hoping that either party will recognize the importance of several key issues: keeping long term capital gains rates low, reducing corporate tax rates, and if we are very very lucky, reducing the tax on corporate dividends. Needless to say, this is a crapshoot at best.
Takeaways
Overall, we feel the watchword for 2008 will be "volatility." Coming off of several years of "alpha," this is going to be the year of "beta."
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