Acquisition Marketplace Review - The Journal of Applied M & A Theory

The MoneySoft M&A Outlook for 2008:

Friction in the marketplace

MoneySoft has not released an M&A Outlook since July 2005. At that time conditions were favorable for M&A activity and we projected that deal activity would increase by 5% to 8%.  Data provided by FactSet Mergerstat indicates that the deal activity increased by 6.7%.

Since our last update, a number of interesting trends and factors caught our eye:

M&A Transaction Activity:

  • The number and value of headline-grabbing, billion-dollar deals peaked at the end of June 2007.  For the twelve months ending 6/30/2007, dealmakers racked up 290 deals with an aggregate value of $1.148 Trillion Dollars.  Since that time, mega-deal activity has dropped.
  • The number of M&A deals leveled off at the very beginning of 2007 showing 0% growth for the 12 months ending 1/30/2007, versus the 12 months ending 1/30/2006.
  • Deal volume for the 12 months ending 9/30/2007 versus 9/30/2006 has dropped by 6.1%.
  • The news from the middle market suggests that the credit crunch has not had an impact on private-company M&A.  However, aggregate deal volume is down 6.1%.  Middle-market and private deals represent over 70% of the volume.  Something is causing friction within the mid-market and private segment.
  • The September Duke University/CFO Business Outlook survey indicates that three-quarters of the CFOs surveyed expect M&A activity to slow.  Of particular interest is the suddenness of this change in expectations.  In the prior quarter’s survey, the majority of surveyed CFOs expected M&A to “stay strong through the remainder of 2007.”

Capital Markets:

  • Equity markets have become much more volatile.  The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a “key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Since its introduction in 1993, VIX has been considered by many to be the world's premier barometer of investor sentiment and market volatility.”  When the last M&A Outlook was written, the VIX was at 11.57.  At the start of November 2007, the VIX had increased to 23.21.
  • Despite the increase in volatility, the NASDAQ Composite Index is up by 15.4% for 2007 and by 28% since the last MoneySoft M&A Outlook was published.  During the same period, the Dow Jones Industrial Average has moved from 10,705 to 13,930—an increase of 30%, but the market is “wobbly.”
  • A tightening of credit has made it more difficult to get leveraged deals funded resulting in downward pressure on purchase price multiples and more restrictive funding terms and loan covenants.

The Dollar and Economy:

  • The value of the dollar has lost value against the following currencies:


July 29, 2005

November 1, 2007

% Change (2)

Canadian Dollar



-22.5 %

Chinese Yuan



- 7.9 %

Euro (1)



- 15.97 %  (2)

UK Pound Sterling (1)



- 15.49 %  (2)


(1) The Euro and Pound Sterling are quoted in Dollars per foreign currency unit.  All other rates are quoted in foreign currency units per US Dollar.  This data is provided by the Federal Reserve Bank of New York.

(2) The % Change is calculated on the basis of foreign current unit per US Dollar.The US GDP grew by 3.8% during Q2-2007 was 3.8%. 

  • The advance estimate just issued by the Bureau of Economic Analysis indicates that GDP grew by 3.9% during Q3-2007.
  • Inflation remained relatively manageable at an average of 2.5% for the first three quarters of 2007.  There is a debate as to whether the content and calculation of the Consumer Price Index is an appropriate measure of actual inflation.
  • The challenges in the sub-prime mortgage market along with a slow down in the housing market have the potential to erode consumer confidence and spending.  Borrowing against the equity in one’s home had become a source of consumer liquidity and purchasing power.  The full impact on consumer confidence and spending behavior is a subject of debate and speculation.
  • In July 2005 the Fed Funds rate was 3.25% and on an upward trajectory.  Two years later the rate hit 5.25%.  In response to the credit squeeze precipitated by the problems in the sub-prime market, the Fed has cut the funds rate by 75 basis points to 4.5%.
  • Based upon data provided by The Conference Board, consumer confidence has dropped by 5.8%. 
  • At the same time, the leading US indicators are up 0.3% with 7 of 10 leading indicators up.
  • At the time of our last M&A Outlook, The Conference Board measure of CEO confidence stood at 55.  The latest survey has CEO confidence at 44.
  • The September Duke/CFO survey of CFOs found that “optimism reached its lowest point since the optimism index launched six years ago.”  “Pessimists out-numbed optimists by a roughly four-to-one margin.”

Domestic and World Politics:

  • The present composition of the US Congress has raised concerns that tax, trade and environmental legislation might be less friendly toward business and capital formation when global competitive pressures have never been higher.
  • The sustained economic growth of India (9.4% GDP growth) and China (11.1% estimated GDP growth) along with the rebound of the Japanese and EU economies presents trade opportunities as well as competitive pressure for US businesses.
  • Crude oil prices have increased nearly two-fold since our last M&A Outlook, with the price of crude now pushing through the $90 per barrel threshold.  The EIA projects a >16% increase in World oil consumption from 2004 to 2015.  Much of this increased consumption is attributed to non-OECD countries in Asia.
  • The US mission in Iraq coupled with a pending conflict with Iran has much of the world holding its breath.  Oil supplies and prices along with political instability are the main concerns.
  • The possibility of terrorist activity and the associated cost of such an event continue to increase uncertainty in markets, especially for oil.

While the above list is not complete, we think it gives a general sense of the business environment and sets the stage for our M&A Outlook.

Summary:  After reviewing the above data and then going through a non-scientific gut-check, we believe that M&A will continue slow, but remain at near historic levels. 

Here is our thinking and our best-guess estimate:

  • Mega deals make headlines, but small undisclosed deals involving private businesses account for about two-thirds of all deals.  While larger deals make the news and determine bonus checks on Wall Street, undisclosed private deals and mid-market deals make up the breadth of the M&A market.
  • The US economy is adjusting to a rapidly changing world.  Information technology and a 24-hour news cycle tend to amplify economic disruptions and propel them into the consciousness of the American consumer and business decision makers.  The information is compelling, conflicting and sometimes incongruent with their experience.  At the same time, the rich availability of information allows businesses to rapidly adapt to the changing terrain.
  • US capital markets and business decision makers don’t like uncertainty, but they don’t wilt when faced with it.  Uncertain times present danger and opportunity.  Uncertainty is always present in the form of various risks—known, unknown and unknowable.  American business is made up of risk takers and risk managers.  Our bet is that managers will adapt to whatever comes their way, but it will take time.
  • Our bottom line is that the majority of M&A deals are driven by the financial motivations of the sellers and the buyers’ ability to get deals funded at economically viable prices. 

The biggest driver is the demographic reality the baby boomers (born between 1946 and 1964) who own businesses are reaching the point in their lives where it makes sense to sell their business interests.  This need to cash out may drive private market M&A deals into 2020. 

Based upon projections from the Bureau of Census, in 2010 the oldest baby boomer will be 65 years old, the middle will be 56 and the youngest will be 47 years old.  Those numbers change in 2020 to 74 for the oldest, 65 for the middle and 56 for the youngest.

  • For both business buyers and selling (retiring) baby boomers, an M&A deal is often the best strategy to meet their personal and business objectives—regardless of the economic climate.  The business climate might influence price multiples along with the form and terms of payment and funding.
  • In addition to the demographic drivers, we believe that the marketing efforts of mid-market intermediaries stimulate M&A activity.  Over the last 10 years, intermediaries and private equity groups that play in the lower third of the middle market have created an engine that is more efficient at bringing companies to market thereby creating a de facto market.

We think that there is a good chance that M&A will slow in the short term as sellers, acquirers and funding sources adjust to some of the new elements in the landscape such as:

  • Tighter underwriting, credit availability and covenants.

(In the middle market, sellers have options for creative financing should credit issues become an impediment to making a deal.  Human nature would suggest that sellers will yield on “terms” before conceding on “price.”)

  • Declining purchase price multiples.
  • A buying environment that provides corporate and strategic buyers with an edge over private equity and buyout firms.There is the forever-present risk that the economy may cool down, consumers may stop spending, and corporate earnings might tank, resulting in a serious hit to stock valuations (public and private).
  • Given the US foreign balance of payments account, we expect that funds probably will continue to flow into US investments at a growing rate.  Investing one’s lower-valued dollars in undervalued US assets is an appealing play.

We anticipate that with time, the M&A market will adjust to the new landscape and continue at a relatively brisk pace for small and mid-sized deals driven by strategic, competitive and demographic factors.

The Numbers:  With risk and uncertainty on one hand and baby boomers getting ready to retire (or pursue the “next chapter” of their lives on the other hand, we think there is a baseline of 9,000 to 9,500 deals a year. 

Add a strong economy, available and affordable funding, and no disruptions, M&A activity could be 15% to 20% higher than the baseline number. 

However, if funding deals becomes an issue and disruptive tax, regulatory or trade policies become law, then we might see an eventual dip of 10% to 15% in the baseline number.  Regressive business policies may increase activity in the short term (i.e., before the law goes into effect). The M&A market will adjust to regressive policies and expect that any dip would be temporary and deal volume would move toward the baseline.

All-in-all, M&A activity should remain near historically high levels, but will probably not set new records until the current set of risks (friction) has been resolved.   

By Robert B. Machiz

© 2007 MoneySoft, Inc.  All rights reserved.


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