Sign of the Times
A monthly market commentary
“M&A Middle Market Activity in 2005”
The most often asked?question?put before me?these days is whether or not?this is a good time to sell a middle market company. It's no secret that there has been a signficant upturn in M&A activity in the past 4-5 months. Despite this and the economic recovery underway, many companies are still struggling, and for a variety of reasons. The most common theme is the increasingly competitive global environment.
In spite of this,?it very well may be the best opportunity since 2000 for a middle market company to enjoy some type of liquidity event, whether it's?some form of?recapitalization or outright acquisition. Let me explain why. For professional investors such as private equity groups there is: 1) low supply and high demand, 2) unattractive alternate investments, and 3) we're definitely in an economic upturn.
With respect to low supply and high demand, the middle market private equity sector is extremely active at the moment looking for workable deals. There is a pent up demand from the relative scarcity of available companies over the past few years. Companies that have suffered along with the economic consequences of the downturn have been reluctant to go to market. This has created a significant imbalance with the net result being that demand for quality companies is far exceeding the availabe supply. I only wish I could satisfy all the private equity groups that are contacting me looking for companies.
The lack of unattractive alternative investments is a powerful motivator. Government and municipal bonds are at historically low yields. Fixed income securities such as corporate and government bonds and bank instruments remain unattractive with the low interest rates.
Since 2000, the broad market for common stocks has performed erratically. While the Dow has recovered much of what was lost since 1999, it still leaves investors with very little to show in gains since that time. The Nasdaq has still only recovered less than 50% of its losses since 2000 with many saying it is overpriced based on earnings analyses.
These factors have pushed investors to the sidelines in the past couple of years with more and more money sitting idle. Strictly looking at this logically, it is creating additional pressure to redirect some of that money into other invesment vehicles. Middle Market companies with a solid business are the cream of the crop. They are in the process of getting the attention they deserve.
Increasingly, there is a general feeling we are in a economic upturn that will continue. The?debt market remains very attractive, with debt financing available at some of the lowest rates?in many years. The prime rate is sitting at 5.5%, slightly up?over the last several months, but still at historic lows since the mid 50's.?
With the economy moving forward, this is creating a powerful incentive for insitutional buyers to get on board now. This is pushing valuations higher as performance expectations over the next 6-7 years are factored into the equation.
All in all, we are fortunate to be operating in the world's largest economy. Certainly we face challenges moving ahead, but overall conditions are improving with companies posting increased revenues and higher operating incomes.