VideoIn August, Beckman Coulter Inc. pulled off a minor miracle: it acquired another company. The $3.6 billion maker of biomedical testing equipment completed the $780 million acquisition of the lab-based diagnostic business of camera maker Olympus, which wanted out of the life-sciences space. Even more amazing than the fact of the deal was how it was structured. "We were able to finance the whole deal, which is unusual in the current economic environment," says Beckman Coulter senior vice president and CFO Charlie Slacik.
Far more typical these days is Inovis, an Atlanta-based B2B software provider that racked up four acquisitions prior to the recession and none since. "Without an equity infusion from the two private-equity funds that own us, we cannot make an acquisition off our own balance sheet," acknowledges Inovis CFO Ken Williams. "While they still have ample funds to lend and invest, they've increased their target internal rate of return to 30% and higher. Sellers, meanwhile, are holding to very high sell points. The combination is just killing deals."
Inovis is just one of many wallflowers at what used to be the biggest party in business. Globally, total merger-and-acquisition transaction volume was down 47.4% in the first half of the year compared with the same period in 2008, while corresponding deal values were down 43.6%, to $705.7 billion, according to Mergermarket. Deal values declined by an even sharper margin in the United States, a stunning 85% dip from July 2008 to July 2009 (to $23 billion), notes Dealogic.
Although the economy shows signs of improvement — slowing unemployment numbers, increasing manufacturing output, a rising stock market — M&A activity remains lackluster. In July, Goldman Sachs CFO David Viniar predicted transactions would increase in the second half of 2009, but as of September, a boom had yet to manifest itself. (Viniar was unavailable for comment.) "No one wants to buy a company when the bottom still isn't clear, and no one wants to sell a company for less than they think it is worth," notes David Hinkel, senior consultant at Towers Perrin, where he is a member of its senior leadership team for corporate transactions.
Still, like Beckman Coulter, some well-funded companies are finding deals that are too good to pass up — Disney's $4 billion acquisition of Marvel Entertainment and Baker Hughes's $5.5 billion merger with BJ Services closed August on a note of deal-making optimism, and September saw Kraft mulling a hostile bid for Cadbury. Some companies have been able to make acquisitions that bolster their product lines and market presence while more-cautious competitors remain on the sidelines, waiting for a rebound in the economy and the credit markets.
Massive Debt Coming Due
The dearth of credit, of course, has been a deal killer for many companies, and for private-equity firms in particular. Private-equity firms typically leverage their acquisitions, and right now prevailing credit terms, conditions, and covenants don't favor a deal. "The private, classic leveraged buyout won't come back until the credit markets come back," says James Rosener, managing partner at New York–based law firm Pepper Hamilton and a member of its international M&A transactions team.
Private equity alone is shouldering more than $400 billion of debt that needs to be paid off before 2014, money borrowed to buy companies in the M&A heyday of 2005–2007. In just the next two years, $21 billion of this debt will mature, according to Standard & Poor's. "Debts done with 'covenants lite' two years ago will be financed with a lot tougher terms when the markets reopen," predicts Rosener. That may make private-equity firms — the gorger at the last M&A feast — more choosy about what they put on their plates, if not keep them away from the table altogether. (U.S. private-equity firms still have plenty of "dry powder" or uncommitted capital at their disposal, more than $600 billion by one recent reckoning.)
This leaves the pickings to strategic dealmakers, companies that buy other companies for complementary or synergistic reasons. But the credit squeeze is pinching them, too. "Liquidity is a major issue for many companies," says Ronald Basso, partner and co-chair of the corporate finance group at law firm Buchanan Ingersoll & Rooney. "They may need to amend their credit agreement with a bank, and, for companies that already have good pricing in their agreements, this is a risk. If they go forward they risk being criticized — doing a deal when they needed to conserve cash to last out the recession."
Is the Price Right?
Uncertainty about deal prices is also keeping otherwise acquisitive companies from shopping. "The issue is valuations — the confidence that you're getting what you think you're getting," says Matt Toole, director of the deals intelligence group in the investment banking division of Thomson Reuters.
Buyers "want to be sure they acquire companies that provide a return to shareholders, and they can't predict that now," notes Adena Friedman, CFO and executive vice president of corporate strategy at Nasdaq OMX Group, where she rode herd on the stock exchange's mergers with OMX and INET. "We don't know when the recession will end, what will happen to inflation or pricing, or when demand will come back. If you can't model these things, it is hard to determine the right price for the asset you want to buy."
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