In the first nine months of 2004, the number of middle market M&A transactions increased by 7.3 percent over the same period in 2003. The value of these transactions grew by 20.1 percent, as purchase price multiples rose to their highest levels since 2000. This growth in M&A transaction volume and value was driven by readily available debt and equity capital, and by better economic performance, topped by third quarter GDP growth of 3.7 percent.
While the overall economic outlook is positive, economic and geopolitical risks do present significant concerns for 2005. The federal budget deficit will need to be addressed, and economic growth may be slowed by rising interest rates and inflationary pressures in key commodities, including oil.
What to focus on in 2005
Equity and debt capital remain plentiful, and all signs indicate these markets will remain liquid in 2005. The private equity community entered 2004 with a surplus of funds to invest and had a strong fund-raising year. As a result, aggressive bidding by financial sponsors eager to put capital to work should keep leveraged buyout purchase price multiples at or above their current levels. Banks and institutional investors also continue to support higher acquisition prices by lending at higher multiples of debt to EBITDA.
Many companies have used their strong 2004 financial performance to reduce debt and build up cash. Now, with better balance sheets, these firms are considering growth opportunities, including acquisitions.
Brown Gibbons Lang's (BGL) current transactions are generating markedly higher levels of interest from corporate acquirers, signaling that an improved economy and greater earnings visibility are creating corporate demand for strategic acquisitions. It is this combination of liquidity in the private equity markets and heightened activity by strategic acquirers that has resulted in higher valuation multiples.
The accelerating pace of globalization throughout the economy and increasing cross-border M&A activity are other important trends for owners and managers to monitor in 2005. As firms take advantage of efficiency gains through outsourcing and offshore production, and seek growth opportunities in foreign markets, they also identify strategic international acquisition targets. Strikingly, this is also true in the middle market.
For example, in the first nine months of 2004, transactions with disclosed values in which a U.S.-based company acquired a foreign firm grew 17.5 percent over the same period one year earlier. Acquisitions of U.S. firms by foreign-based companies increased 12.7 percent. BGL and its partners in Global M&A, a partnership of 24 top middle-market investment banks around the world, have completed more than 400 transactions since 2000. Global M&A's cross-border pipeline for 2005 is more robust than ever before.
Entering 2005, business owners and managers should anticipate a positive economic environment and continued liquidity in debt and equity capital markets. For these reasons, it remains an opportune time to purchase or sell a middle-market business.
However, given significant macroeconomic and geopolitical uncertainties, these conditions may change rapidly and without notice. We recommend that owners and managers considering major corporate finance or M&A transactions should execute their plans early in the year to capitalize on the current favorable conditions.
Craig A. Korte (email@example.com) is vice president of Brown Gibbons Lang & Co. He focuses primarily on Mergers & Acquisitions and corporate restructuring. Reach him at (312) 658-1600.