Mergers and acquisitions slowed significantly in Q3 2011, hindered by economic uncertainty that stifled the confidence and growth projections of corporate executives.
The few companies eager to seize on
opportunities are bumping up against reluctant lenders.
High-yield debt that serial
acquirers in the private equity world rely on for deal-making has become harder
to find, in part because troubled European banks are bowing out of financing
deals. Private-equity backed M&A,
which typically relies heavily on high-yield financing, is down 22 percent from
Q2 2011.
Announced
M&A deals for the volatile Q3 will have declined about 23% from the
previous three months,
according to Thomson Reuters Deals Intelligence, as stock market fluctuations,
the European debt crisis and the U.S. budget stalemate put many planned deals
on hold.
The $16.5 billion purchase of
Goodrich Corp that United Technologies unveiled last week was on track for an
August announcement before wild market fluctuations side tracked deal talks, a
source familiar with the deal said.
The good news is that
well-capitalized companies such as United Technologies, Google, IBM, Dell,
Xerox and Oracle can get financing when they want it.
Once economic and geopolitical
clouds clear, deal books will circulate again. Regardless, smaller M&A
transactions are getting done and are expected to remain strong for the next
few quarters.
The global deal count for the first
nine months is up 20 percent over last
year, mostly due to strength in the first half of the year, the data shows.
Deals in Q3, through September 22, fell
to $539 billion from $699 billion in the previous quarter (Q2 2011),
according to Deals Intelligence.
Europe
and Asia Pacific have been hit particularly hard, with deals
in each region falling 34% from the
previous quarter.
The lack of financing for deals
involving non-investment-grade companies is a significant cause of the drag. A
number of deals have gone sideways, but are likely to be resurrected when the markets
rebound.
Investment-grade companies have had
more luck but even they have bumped up against tighter lending as banks fret
over the effects of the European debt crisis.
One bright spot for M&A is that
the size of deals announced in the quarter increased to an average of $155.9
million, the second-highest level in the last three years, according to Thomson
Reuters data.
Large companies with strong reserves
of cash will continue to be aggressive, in spite of the current uncertainty.
After starting with a bang, deal
volume for 2011 is on track to end only 5 to 10 percent higher than last year, according
to research estimates. That points to a dreadful fourth quarter since deal
value is currently about 20 percent up from last year.
The themes that drove healthier deal
making last year -- strong cash balances and available financing -- are still
present.
Uncertainty about the global economy
is the swing factor that could impact the next few quarters.
IT Services M&A Transaction Highlights and Multiples
M&A transaction multiples for
the latest quarter (Q3 2011) in the IT services sector averaged 0.7x transaction
value-to-trailing twelve months revenue (TTM), with a low of 0.1x and a high of 1.8x.
Highlights and most active acquirers
in Q3 2011 include:
ü
Fusionstorm filed to go
public in August and also acquired two companies, Global Technology Resources
and Red River Computer Co.
ü
All Covered (Konica Minolta Business Solutions) acquired
two companies, Vertical IT Solutions and LAN Associates.
ü
CSC acquired
two companies, AppLabs Technologies and Maricom Systems.
ü
Cognizant
Technology Solutions
acquired two companies, Zaffera and CoreLogic Global Services.
ü
Affiliated
Computer Services (Xerox) acquired Italy-based BPO and call center firm XL
World.
For the complete report and download (free), go to: www.generationequityadvisors.com
Data
Sources: Thompson
Reuters, FactSet Mergerstat, The 451 Group, Ernst & Young, Generation
Equity Advisors Research and Company websites.
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