Purchase price allocation work may not be rebounding…yet

BVWireIssue #88-2
January 13, 2010

“Business owners are slowly realizing that valuations will not return to what they were several years ago. Private equity and strategic buyers are all too aware of this and are patiently waiting for sellers to come to grips with the new valuation paradigm and to take some money off the table,” says Harris Smith, Managing Partner of Private Equity and Strategic Relationships at Grant Thornton, LLP, commenting on the year-end Dealmakers Survey by the Association for Corporate Growth (ACG) and Thomson Reuters. The pervasive pessimism about the M&A market has not changed much since the mid-year survey, with the vast majority (87%) of dealmakers still saying the current environment is fair or poor, compared to 88% at mid-year 2009, and 86% in December 2008.

Yet, over the next six months, the percentage of dealmakers who expect an increase in merger activity jumped from 56% six months ago to 82%, according to the ACG release. Notably, the credit crunch is no longer considered the biggest obstacle to M&A; instead, respondents say the price gap has risen in importance (37% today vs. 27% mid-year, and 22% at year-end 2008). PE respondents say they have written down their portfolio company values in the last twelve months by: 15% or less (32%); 16-25% (16%); more than 25% (9%); held steady (36%); and marked-up (7%).
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