The M&A market is still in its boomer years: On a first quarter annualized basis, both the volume and value of domestic transactions for 2007 are on track to exceed 2006 levels—which topped 2005 levels by 13.6% (volume) and 26.6% (value).
“We are even with or higher than 1999 levels,” said Jennifer Muller, a director at Houlihan Lokey Howard & Zukin, speaking at last week’s “Current Topics in Business Valuation,” sponsored by the ASA’s LA Chapter. The market’s main drivers are the “mega-deals” and the “clubbing” of private equity purchasers; the ten largest transactions in Q1 2007 accounted for over half (52%) of domestic M&A volume.
An important consideration for valuators: “Control premiums paid have been going down over time, as the public market has become fully-valued,” Muller noted. “Buyers have less ability to pay more than is already in the public price.”
And size does matter, as larger companies continue to be valued at a premium to middle market companies. “Smaller companies are not able to leverage their EBITDA in the current debt markets,” which—given the billion-dollar flush of private equity, currently offers these powerful purchasers looser debt covenants. Leverage multiples (debt/EBITDA) are on the rise—but how will this impact internal rates of return and “market participant” evaluations, if the next buyer can’t sustain such leverage rates? And the burning question: Is the boom about to bust? Look for a discussion of these and more in an upcoming issue of Business Valuation Update™.
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