PricewaterhouseCoopers Outlook: Merger and Acquisition Environment to Be One of High Risk, High Reward for Remainder of 2009

/PRNewswire/ -- In the current credit market where access to syndicated loans to finance large transactions remains limited, one of the few places that deals are getting done in the U.S. is in the middle market, according to the Transaction Services group of PricewaterhouseCoopers. For the first half of 2009, 135 middle market deals were announced with an aggregate deal value of $39.2 billion. "As in the last recession, it's the smaller transactions that are getting financed because deals of that size don't require assistance from the capital markets or the structuring of highly leveraged loans," said Robert Filek, a partner in PricewaterhouseCoopers' Transaction Services practice.

Also on the deal horizon for the rest of 2009 will be a few large, bellwether transactions orchestrated by adventurous dealmakers willing to operate in a very high risk, high reward M&A environment, where rigorous due diligence will undoubtedly be integral. "There is no doubt that within the next 18 months, some of the deals that get done will be looked upon as the most lucrative, potentially in the last couple of decades," said Filek. "It's really an era for explorers, who are willing to try and navigate in unchartered territory, and great riches may await for those who venture there. However, as explorers have found for centuries, riches are difficult to find and many explorers never return."

Among the riskiest types of deal activity in this recessionary market are cross-border M&A transactions. In terms of outbound activity, PricewaterhouseCoopers does not expect that CEOs of U.S. companies will be very aggressive in looking outside of the borders. One exception for cross-border M&A will be extremely opportunistic situations or merger of necessity circumstances where a company's key suppliers are going out of business and they need to firm up their supply chain.

Different from previous recessions, PricewaterhouseCoopers believes this one will result in global restructuring, and in the process global economies are in the midst of a long period of slower, more volatile growth. Filek stated, "Because this recession has been global and because all of the government stimulus packages are not created equal, it is likely that emerging markets like China and India will accelerate more quickly than other economies. We would expect that we will see an increase in Chinese acquisitions of U.S. and European companies."

Expanding on acquisition activity in Asia, Greg Peterson, a partner in PricewaterhouseCoopers' Transaction Services practice observed that developing countries continue to pursue commodities. "If you look at acquisitions coming out of Asia they tend to be very strategic and centered around transport and commodities because both are critical to continued growth. China, in particular has the capital to pursue those areas aggressively," he noted.

As forecast in PricewaterhouseCoopers' initial 2009 M&A outlook release, the deal landscape has seen an uptick in distressed investments across several sectors, which Peterson expects will continue. "A number of private equity funds historically cut their teeth in distressed deals and morphed into private equity funds in previous cycles," he said. "You have a host of private equity players who know how to do distressed, and do it well. Overall the private equity funds have in excess of $1 trillion waiting to be deployed but it will not be done without discipline."

Peterson noted that standalone distressed funds have raised billions in capital that will be deployed by either going after equity or transactions, allocating it to upside down balance sheets or to buying debt as a means of gaining control of a company or a way to be in a lead position through bankruptcy. The number of U.S. businesses filing for bankruptcy totaled 14,319 for the first three months of 2009 compared to 8,713 filings for the first three months of 2008, according to the American Bankruptcy Institute. Peterson noted the lack of reliable DIP (Debtor-In-Possession) financing in this recession will lead to more companies and investors negotiating their re-financing packages out of court or, where unsuccessful, perhaps even moving directly to Chapter 7.

According to Thomson Reuters, announced U.S. deal value and volume through May 2009 totaled $248.7 billion and 2,507 deals respectively, down from $428.6 billion and 3,750 deals for the same period in 2008. Private equity accounted 5% of the U.S. deal value and 20% of volume for the first five months of 2009, compared with 26% and 17%, respectively, for the same period in 2008. With regard to new deal activity, Peterson noted from the private equity perspective that deal volume and pipeline will continue to be slow for the balance of 2009 because of uncertainty around leveraged markets assisting private equity in the short term, and a fall off in club deals... "There may be some exceptions such as high-profile opportunities where the government or seller would make financing available or there may be some bolt-on opportunities to existing portfolio companies, but the folks with the checkbooks and the currency right now seem to be the corporates."

Sectors that continue to present opportunities include...

-- Technology -This sector is poised for another wave of consolidation
with mature business models and healthy balance sheets.

-- Energy- The stabilized crude price and great cash flow prospects,
buttressed by continued opportunities to grow these businesses makes
this sector a consolidation hotspot.

-- Pharma/Healthcare-The healthcaresector will continue to be in the
spotlight, most notably pharmaceuticals with drug companies seeking to
fill their pipeline through acquisitions and focus on true core
competencies by selling non strategic divisions/operations. As the
Obama administration realigns the health care system, there are going
to be players who look to basically realign their business model to
take advantage of the emerging environment.

-- Financial services - Consolidation in this space will be rampant,
driven by mergers of necessity where companies combine because the
opportunity is compelling and the sellers have to exit, and in many
cases will be a distressed situation. Specifically in banking, there
will be a flight to quality, referring to banks performing in the
upper quartile and getting out from under TARP and heavy government
oversight.

Both Peterson and Filek are optimistic about an upturn in the deal market. "There are a growing number of dealmakers, including private equity firms, who want to get on track now for the market's ultimate return," said Peterson.

Similarly, Filek sees opportunities for companies on both ends of the spectrum - those that have been moderately affected by the recession and those that have been hurt badly. "While some companies will be compelled to make acquisitions only if it is key to their survival, others may believe that it is a good time to combine with a partner and prepare for the uptick in the economy. We are seeing early signs of restored confidence needed for the return of a robust M&A market, which can in part be attributed to stimulus activities beginning to take effect." Filek also noted that the "slower pace of deals getting done can be attributed, in part, to increased and more tightly controlled due diligence by both buyers and sellers, which is necessary in this environment."

*The accuracy of our previous forecast does not guarantee future accuracy.

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