Market may be ready to bust out of rut Featured

8:01pm EDT April 30, 2011

Those hoping for a boost in merger and acquisition activity in March were disappointed. It continued a trend of slow activity that persisted throughout much of the first three months of 2011. This first-quarter lag can be attributed to the push in the fourth quarter to complete deals due to the threat of an increasing capital gains tax. But fear not, better days may be right around the corner. Despite the slow start, it appears there will be a significant increase in M&A activity, and 2011 should be a robust year.

Some of the key drivers supporting deal activity in the near future are a direct result of the improving economy. Many companies have rebounded from a dismal 2009 and returned to profitability in 2010. The availability of capital has increased as banks have returned to lending, and private equity groups, which have been sitting on the sidelines for the past 18 months, are looking to deploy capital in order to raise new funds.

In addition to seeking new investment opportunities, private equity groups will look to divest portfolio companies over the near term. Furthermore, many corporations have record levels of cash on their balance sheets, which is fueling a flurry of deal activity as strategic buyers look to grow and diversify.

Although M&A activity was sluggish in March, media and print companies were active in the Cleveland area. Cleveland-based American Greetings Corp. acquired Watermark Publishing Ltd. through its European subsidiary, UK Greetings Ltd. Located in Corby, England, Watermark generates around $40 million in revenue annually and has assembled more than 4,500 greeting card designs in their portfolio. This acquisition broadens the product offering of American Greetings and will allow its European subsidiary to increase its market share.

Another entertaining print company located in the Cleveland area is Mental Floss LLC, publisher of Mental_Floss Magazine. The quirky magazine, “where knowledge junkies get their fix,” is located in the Geauga County suburb of Chesterland and delivers informational facts on just about everything from the most dangerous pieces of art to cheat sheets about the theologian Augustine. Felix Dennis, who introduced the magazines Maxim and Stuff to the U.S., announced his intention to purchase the company and move the headquarters to New York.

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.melcappartners.com. For more information about the Association for Corporate Growth, please visit www.acg.org/cleveland.

Deal of the Month

March was an excellent month for Wickliffe, about a 10-minute drive east of downtown Cleveland, as Berkshire Hathaway Inc. announced it would acquire Lubrizol Corp. for $9.7 billion. The price was a 28 percent premium above Lubrizol’s closing price before the transaction was announced. Expected to close this fall, the transaction would represent Berkshire Hathaway’s third-largest acquisition to date behind General Re Corp. and BNSF Railway Co. The $135-per share bid price is quite a jump from the $23.56 low hit only two years prior in March 2009. However, the company has rebounded with solid revenue and income since the economic downturn of 2008. Lubrizol, a specialty chemical company primarily engaged in the production of lubricants and additives, has itself been acquisitive. It just recently purchased the personal care business of Nalco Holding Co. for $166 million in January. Lubrizol’s headquarters will remain in Wickliffe and the current management team, led by James Hambrick, will continue operations. Congratulations to Lubrizol on achieving great value with excellent performance.