Market enters fall with uncertainty

Albert D. Melchiorre, President, MelCap Partners, LLC

High domestic unemployment and low domestic consumer spending teamed with the heavy burden of a European economic debt crisis has tampered with potential merger and acquisition growth. With third-quarter deal volume down 16 percent and an uneventful month in October, the M&A markets are attentively watching to see what will evolve in the overall marketplace.

Confidence has weakened from international debt policies and recent increased regulations. At the same time, there is some optimism out there as a result of certain positive market data. Gross domestic product is one definitive indication of a growing market, and current third-quarter estimates for the U.S. economy are at 2.5 percent growth, double the previous quarter. Another encouraging sign for M&A markets is the amount of debt and equity available for transactions. 

S&P nonfinancial companies have accumulated more than $1 trillion of cash and short-term investments on their balance sheets. This is 58 percent higher than during the market slowdown in 2008. Private equity “overhang” (funds available from private equity groups for acquisitions) combined with S&P 500 cash balances, totals more than $1.5 trillion of capital available for acquisitions.  

With mixed market data, some companies are playing it very conservative while others are seeing the market as an advantageous time to pursue other companies. The market appears uncertain as August posted the highest activity of the year and September the slowest activity of the year. The value of companies, or rather the multiples on companies, remains high as buyers compete for healthy companies and banks compete vehemently to provide lending for those transactions.

In Northeast Ohio, there was some activity but not at the level seen in previous months.  The Riverside Co., nevertheless, remained by far the most aggressive group in Cleveland, completing three separate transactions. Riverside completed two acquisitions including ECN Inc., an emergency communication group that issues messages on behalf of government and education entities, and PPS AB, a private school operator in Sweden.  

Albert D. Melchiorre is the president of MelCap Partners LLC, a middle-market investment banking firm. He is also a director on the ACG Cleveland board. For more information on MelCap Partners, please visit www.melcap.co. For more information about the Association for Corporate Growth, please visit www.acg.org/cleveland.

Deal of the Month

The deal of the month goes to a transaction between two local companies. On Oct. 3, Cleveland’s PolyOne Corp. announced it would acquire Berea’s ColorMatrix for $486 million. ColorMatrix, a leading manufacturer of specialty additives, liquid colorants and dosing technologies globally, had sales of $196.8 million and EBITDA of $43.6 million for its fiscal year ending June 30. For the past decade, ColorMatrix has increased EBITDA by 16 percent annually.

PolyOne, a provider of specialized polymer materials, services and solutions, will add additional support to its specialty business through the acquisition. The company’s specialty business will now be greater than 50 percent of operating income compared to 2 percent of operating income in 2005. PolyOne also adds an additional 162 patents and another 107 pending patents with the acquisition. PolyOne expects to increase its global reach through the acquisition and build on revenue of $2.6 billion in 2010.

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