Fact or Fiction: Mike Ginsberg Blogs on Q1 M&A Results

Earlier this week, we announced first quarter results for mergers and acquisitions in the ARM industry (“Q1 M&A Activity in the ARM Industry – Financial Buyers Active Again,” April 12). Six transactions closed in Q110 with an estimated total deal value of $111 million, but this tells only part of the story. Through a round of “Fact or Fiction” I will dispel some of the the myths surrounding this divisive topic.

Fact or Fiction? Buyer interest is down, resulting in fewer transactions closing. This is fiction. Fewer transactions are closing but not because of a lack of interest. Buyer interest is actually very high. Financial buyers are aggressively seeking to buy the right platform company to either inject themselves into the industry, or acquire strategic add-ons if they have already made an initial investment. Industry buyers and strategic buyers (CRM, revenue cycle or BPO companies for example) are also looking for the right acquisition opportunities.

Fact or Fiction? Financing remains hard to come by for M&A transactions. This is a fact. Traditional lending sources are still very conservative with acquisition financing and the cost of capital has not come down. Buyers of ARM companies are using their own balance sheet and creative deal structures to finance transactions.

Fact or Fiction? Financial buyers are the only buyers in today’s market. This is nonsense. It is true that private equity firms, hedge funds, and search funds actively market their interest in making acquisitions by sending countless letters, attending conferences, and making phone calls. Therefore they are a lot more visible. However, industry buyers and strategic buyers do exist and may present attractive alternatives for today’s sellers. Just because they are not aggressive marketers does not make them any less qualified as buyers.

Fact or Fiction? Only distressed companies are selling in today’s market. Fiction. By definition, distressed companies are forced to do something to improve their position and selling may be a viable option. However, owners sell companies for reasons other than distress. A lot of other reasons. Top performers are available if you know where to look.

Fact or Fiction? Prices being paid for companies are down across the board. Fiction. A few years back, when liquidation performance was stronger and financing was readily available, sellers were commanding relatively high cash prices regardless of their individual performance. Even poor performers were getting 5x EBITDA for their business. Today’s M&A market is different but that does not mean that all prices being paid for all companies are down across the board. Sellers that do not have consistent top- and bottom-line performance, a strong leadership team in place, and a defensible position with their clients are not going to generate high prices in today’s market. That’s a fact. However, top performers are in an excellent position to generate prices at attractive levels.

That concludes this round of “Fact or Fiction.” I leave you with this thought. In today’s market, poor performing companies with financial challenges will sell for low prices with little or no cash to the seller at time of closing. Average companies will command average prices with somewhat better terms. Top performers that are checking all of the right boxes warrant high prices with attractive deal terms. Knowing where you rank, before you start talking to buyers, is half the battle.