Mergers and acquisitions drop more than 30 percent

Greg Edwards, St. Louis Business Journal, May 2009

Vince Garozzo, a St. Louis mergers-and-acquisition lawyer, made a prediction in an interview early last year: If dark economic clouds continued to form, private equity funds and other financial buyers would exit the M&A market, and only strategic buyers — companies adding to their core businesses — would remain.

And that’s pretty much what has happened.

“The financial buyers are no longer in the market at all,” said Garozzo, a lawyer at Greensfelder, Hemker & Gale and past president of the St. Louis chapter of the Association for Corporate Growth (ACG), a trade group for mergers and acquisitions. “And the strategic buyers are few and far between.”

As a result, the number of deals has been dropping. Garozzo’s firm went from working on 20 to 25 M&A transactions in 2007 to about five a year now. The Fortune Group, an investment banking firm, tracks sales of St. Louis companies and counted 14 in the first quarter, compared with 28 in the first quarter last year. “There weren’t many transactions that started in the fourth quarter of 2008, so not many closed in the first quarter of 2009,” John Hull, a Fortune director, said.Among small business, BizBuySell, an online business broker, reported 1,146 deals in the U.S. in the first quarter, down more than a third compared with the first quarter last year. Median sale price for those deals was $165,500 in the first quarter, compared with $200,000 a year ago.

The ACG industry group, which tracks market sentiment nationally with twice-a-year surveys of M&A professionals, found that dealmakers’ confidence reached an all-time low by the end of 2008, with 86 percent saying the current environment is fair or poor for sales. Thos who said it was good or excellent fell to 14 percent from a high of 93 percent in June 2007. No one will be surprised if those numbers are little or no better when the ACG publishes its most recent survey later this month.

It’s quite a turnaround from the buying frenzy of recent years. “Two years ago, buyers were just excited to make an acquisition,” said Barbara Hartung, a director at the R.L. Hulett & Co. investment banking firm. For example, she said, buyers then weren’t deterred when an acquisition target’s customer base was too concentrated. “They would have said, “That’s OK; I’ll expand it.’ Today that buyer will be looking for price concessions or walking away.” R.L. Hulett closed 10 deals in 2007 and about the same in 2008, but that number likely will drop to seven or fewer this year, she said.

Still, there are warm spots in the market.

“There are still companies that need a sucession plan and need to be sold,” said Jim O’Donnell III , owner of O’Donnell Capital, an investment partner and advisory firm. An alternative for those owners, he said, is to take on an investment partner, so the owner retains a sizable share of the company for now and can divest entirely when the market improves.

Hartung said sectors that still attract interest from buyers are information technology software, computer and video gaming, pharmaceutical and medical and specialty manufacturers, especially high tech, though sale prices are typically lower than they once were. Her company represented St. Louis’ Federated Software in its sale to Boeing in December.

Scott Osborne at Pritchard Osborne Equity Ventures in Clayton characterizes the current market as “wait and see” because people don’t want to sell at a low ebb. “What I call sense-of-urgency deals are still getting made,” such as sales because of divorce or illness, or companies with a good business model but a shaky balance sheet.

For smaller deals- companies with annual revenue of $2 million to $10 million- Pritchard Osborne has found a niche that hasn’t tanked, the home-care industry. The firm specializes in that small-cap arena, and does so nationally, not just regionally. “You fish in a national pond,” which increases the number of potential deals, Osborne said.

The Fortune Group recommends that those who do not have an urgent need to sell should simply wait. “We’re not long-term bears,” Hull said. “We have counseled clients that this isn’t the best time to come to market.”

SO when will it turn around? The professionals have guesses but no guarantees. “I’m cautiously optimistic that there will be a pick-up in late 2009,” Garozzo said. “Whether that will trickle down to the middle market is unclear. We’ll probably not ramp up till sometime in 2010.”