Investment Banking

Despite greater stability within the banking system and improvement in the overall economic environment, limited credit availability and relatively difficult economic conditions have held M&A transactions at low levels in 2009. The total value of M&A worldwide fell 45% in the first 10 months of the year as a lack of financing and discounted multiples applied to deteriorated earnings have expanded the gap between buyer and seller value expectations. Leveraged buyout activity in the U.S. declined approximately 50% for the 12-month period ending October 31, 2009, relative to the prior 12-month period ending October 31, 2008.

While private equity sponsors in the middle market are realizing the impact from the current volatility, conditions in the middle market are more stable. Deals are still being executed in the middle market, albeit with higher debt pricing, reduced leverage and more in-depth due diligence. Private equity fund raising declined precipitously in 2009, with $57 billion in funds raised as of year-to-date 11/16/09, compared to $264 billion raised in 2008. However, there is still over $500 billion of committed private equity capital looking for a home and private equity firms are aggressively pursuing high-quality middle market acquisition targets.

While 2009 has been a slow year for mergers and acquisitions, there are several signs that point to an impending uptick in transaction volume. Anecdotal evidence suggests that corporate dialogue regarding M&A has picked up as there is a perception that financial system risk has fallen to a low level. Additionally, many companies have completed substantial work to shore up balance sheets and restore financial liquidity. Managers now need to determine how to expand their businesses in an economy that continues to be lackluster at best. Buying growth from the outside, rather than generating it organically, may be the easiest option. With the debt markets open for creditworthy companies, there is likely to be more momentum for M&A into 2010.

Going forward, the M&A environment will be different than the boom years of 2005-2007. Whereas previously high purchase prices were bolstered by readily available leverage and high-leverage multiples, lenders will continue to be much more conservative in how they deploy their capital. Strategic buyers have regained the edge they lost to financial buyers in the 2005-2007 period, when leverage multiples were at record highs. Debt that is available is no longer "covenant light" and is likely to be forthcoming only for the buyers (private equity or otherwise) who are willing to pay a large component of the purchase price with their own equity. Equity components representing 40%-50% of the total capitalization have become the norm in this environment.