Multiple benefits
We may be suffering from the effects of a devastating recession, but there are pockets of life, particularly in the M&A market. Between the end of Q1 and Q4 2009 the average public company price/earnings multiple rose by 78% to 15.1, according to BDO LLP’s Private Company Price Index (PCPI). The impressive 78% rise saw the multiple reach its highest level since Q1 2007, the peak of the M&A boom in terms of transaction pricing.
Deal activity during 2009 was, of course, supported by the growth in ‘distressed’ transactions driven by pressure from the banks. More recently there has been a fall in the level of bank-driven activity which has reduced the overall number of transactions. However, the recovery in public market multiples has given grounds for genuine optimism.
Christopher Clark, M&A Partner at BDO LLP, says: “We’ve seen a pretty dramatic recovery in public market multiples, particularly during the second half of 2009, as well as a mini-recovery in private company valuations. This recovery is due to rising public company valuations giving buyers greater confidence to pay higher prices, a lack of supply of quality assets and a pent-up supply of private equity capital.”
BDO’s PCPI suggests we are seeing a return to normality, with the FT Non-Financial Index trading at a premium to the PCPI by around 30%, reflecting greater liquidity within the public markets.
Looking ahead, Clark says: “During the debt-fuelled boom period, the Private Equity Price Index raced ahead of the PCPI, and in 2010 we expect to see broad consistency between them as they pick up the pace of recovery. Buyers might be faced with election uncertainty, cuts to public spending and tax increases which may impact on the pace of recovery, but there are plenty of positives. Improvements in the debt markets are likely to continue, and there will be a degree of catch-up following destocking during 2009.”
Of course this catch-up may only come at a relatively modest pace, as the gears and levers of big business receive the fiscal lubrication of relaxed credit markets and a more positive investment outlook, but it's the fact we're moving at all that's really significant.
While we remain a long way from the boom years, figures like these that show we may be getting back on track in general terms – and that for M&A specialists, there are real opportunities out there right now.
