“I’m Not Dead Yet!”

In Monty Python’s 1975 comedic film, actor John Young (who also appeared in Life of Brian and Chariots of Fire) cries out “I’m not dead yet!” while laying in a heap on a cart full of otherwise dead bodies.  It’s one of the classic lines in the film.

So too with the M&A market.  It’s down for sure, but not dead.  Here are a couple of current graphs showing private equity-backed acquisitions.  Keep in mind that the first half of 2008 was still a frothy time, with activity well above historical norms.  Also keep in mind that private equity firms are currently sitting on an estimated $400 Billion in capital commitments that have not been deployed.  That’s a lot of money waiting to go to work. 

When the fund managers get un-distracted from working out distress in their portfolio companies, I expect to see deal activity increase.  The signs are already showing, with a healthy increase in phone calls and emails from private equity groups in the last 2-3 months, all looking for new acquisition targets.

First we see that deal volume is still down but keeps trying to recover.

PEG deal volume

Next we see that deal size appears to have bottomed out in Q4 ’08 and Q1 ’09.  The mega-deals aren’t back yet, but the middle market is “not dead yet.”

PEG deal size

What does this mean for the rest of 2009 and 2010? 

First of all, until banks start lending irresponsibly again, the combination of high private equity deal volume and high pricing multiples will not return to the heady levels of 2006 – 08.  Volume will increase soon for two reasons:  1) pent up demand from the sell side (business owners looking for an exit may sit on the sidelines for awhile, but eventually they still need an exit), and 2) the aforementioned $400 Billion in private equity overhang.

Valuations will be reasonable by historical standards, but this will irritate some sellers who watched their friends (or enemies) get paid unreasonable valuations in the irresponsibly leveraged deals of yesteryear.


— David Bass


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