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M&A Outlook 2011

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M&A Outlook: Turning Point or Roadblock Ahead for the Capital Markets? …

M&A Outlook: Turning Point or Roadblock Ahead for the Capital Markets?

Pepperdine Private Capital Markets Project presents the findings from its Spring 2011 survey of private lenders and investors, and the privately-held companies they serve.

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  • 1. M&A Outlook Graziadio Alumni Network May 19, 2011 John K. Paglia, Ph.D., CFA, CPA Associate Professor of Finance Senior Researcher, Pepperdine Private Capital Markets Project
  • 2.
    • What is cost of capital for privately-held businesses?
    • The project launched in 2007; first report in July 2009
    • We now survey 12 segments semi-annually
    • Survey asks about firm profile, behavior, returns, view of next 12 months
    • Next report to be released within two weeks
    • Certificate in Private Capital Markets
    Pepperdine Private Capital Markets Project
  • 3.
    • What is the Status of Privately-Held Businesses as of Spring 2011?
  • 4.  
  • 5.  
  • 6. What are Owners Focusing on Today?
  • 7.  
  • 8.  
  • 9.
    • Nearly 95% of business owners report having the enthusiasm to execute growth strategies
    • Yet just 53% report having the necessary financial resources to successfully execute growth strategies
    State of Financing
  • 10.
    • How much senior leverage is available for transactions?
    • How much junior leverage is available and what are the total debt thresholds?
    • How much equity is available for growth capital and transactions?
    Capital Access Drives Valuations and Deal Flow in the Middle Markets
  • 11. Median Deal Multiples by Financial Buyers Investment Banker Survey (Spring 2011) Industry $1M EBITDA $5M EBITDA $10M EBITDA $15M EBITDA $25M EBITDA $50M EBITDA $100M EBITDA Service 4.0 5.0 6.0 7.0 7.0 8.0 12.0 Mfg. 4.0 5.0 6.0 5.3 6.0 7.0 10.0 Retail 3.5 5.0 6.0 7.0 6.0 7.5 8.5 Wholesale 4.8 5.3 3.3 4.0 6.5 7.0 8.0 Distribution 4.3 5.3 5.0 4.5 5.3 6.5 6.0 Oil and Gas 4.5 4.0 4.0 5.0 6.0 7.0 NA Restaurant 3.0 3.0 3.5 4.0 6.0 6.0 NA Healthcare 5.0 6.5 6.8 6.0 6.0 7.0 7.0 Technology 5.0 7.0 8.0 9.0 8.0 10.5 9.0 Media / Ent. 5.5 5.5 4.0 7.0 7.0 8.0 7.5 Average 4.4 5.2 5.3 5.9 6.4 7.5 8.5
  • 12.  
  • 13. Business Transfer Intentions (Spring 2011)
  • 14. Business Transfer Timing (Spring 2011)
  • 15.
    • Insights from Investment Bankers
  • 16.
    • Deal flow has increased slightly
    • Leverage multiples have improved slightly, as have deal multiples, particularly for later-stage companies
    • Due diligence efforts by banks and buyers have increased
    Compared to Six Months Ago
  • 17. 40% of Business Sale Engagements Expired Without a Transaction
  • 18. Valuation Gaps for Non-Transacted Engagements
  • 19. Difficulty Securing Senior Debt?   Very difficult Difficult Somewhat Difficult Neutral Somewhat Easy Easy Very Easy % Difficult $1M EBITDA 41.3% 27.3% 19.8% 8.3% 2.5% 0.0% 0.8% 88.4% $5M EBITDA 12.7% 14.4% 33.9% 23.7% 10.2% 1.7% 3.4% 61.0% $10M EBITDA 6.6% 10.5% 15.8% 25.0% 27.6% 11.8% 2.6% 32.9% $15M EBITDA 5.8% 5.8% 19.2% 19.2% 28.8% 19.2% 1.9% 30.8% $25M EBITDA 6.5% 4.3% 17.4% 21.7% 19.6% 21.7% 8.7% 28.2% $50M EBITDA 11.4% 5.7% 5.7% 20.0% 28.6% 14.3% 14.3% 22.8% $100M+ EBITDA 12.9% 6.5% 3.2% 25.8% 22.6% 12.9% 16.1% 22.6%
  • 20. Balance of Capital with Opportunities   Companies worthy of financing GREATLY exceed capital available Companies worthy of financing exceed capital available General balance between companies worthy of financing and capital available Capital available exceeds companies worthy of financing Capital available GREATLY exceeds companies worthy of financing Score $1M EBITDA 28.6% 37.1% 20.0% 11.4% 2.9% -0.8 $5M EBITDA 13.2% 30.9% 32.4% 17.6% 5.9% -0.3 $10M EBITDA 5.7% 17.0% 39.6% 24.5% 13.2% 0.2 $15M EBITDA 4.9% 22.0% 29.3% 31.7% 12.2% 0.2 $25M EBITDA 6.3% 15.6% 31.3% 18.8% 28.1% 0.5 $50M EBITDA 13.8% 10.3% 13.8% 31.0% 31.0% 0.6 $100M EBITDA 18.5% 11.1% 14.8% 22.2% 33.3% 0.4 > $100M EBITDA 14.8% 11.1% 14.8% 11.1% 48.1% 0.7
  • 21. Top Issues Facing Privately Held Businesses (Today versus Emerging) Today Emerging
  • 22.
    • Business owners are more optimistic, back to focusing on expansion, and looking for exit opportunities
    • Capital availability is robust for larger companies, still a concern for smaller ones
    • Deal market active for larger companies, improving for smaller ones
    M&A Outlook The Road Ahead
  • 23.
    • John K. Paglia, Ph.D., CFA, CPA
    • Associate Professor of Finance
    • Senior Researcher, Pepperdine Private Capital Markets Project
    • bschool.pepperdine.edu/privatecapital
    • [email_address]
    Thank You!

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