Favourable conditions
The
UK has been out of recession for two quarters now. And while there
has yet to be any upsurge in transaction numbers, market confidence
is growing.
This is the message from the latest quarter's Private Company Price Index (PCPI) from BDO. As Christopher Clark, corporate finance partner at BDO, comments: "Despite seeing historically low deal numbers in Q1 of 2010 there is now a feeling of cautious optimism. Following a period of internal focus and consolidation, there is a renewed confidence in the market with some 80 per cent of companies now seeing M&A as a key part of corporate strategy."
The lead time involved in M&A activity means that current statistics reflect the overall economic situation of around a year ago. Before the Credit Crunch, from the initial decision to sell a business until closure of the successful deal usually took between four and six months. In the current economic environment, buyers of businesses and providers of finance are far more cautious than before and this has extended the timeframe to complete a transaction. With this in mind, for a transaction to complete in Q1 2010, they would probably have had to have started around Q2/Q3 2009 – or earlier. At that point in the cycle, valuations were at the bottom of the market (in Q1 2009).
Transaction volumes have been supported – even at the consistently low levels since the second half of 2008 – by increased volumes of deals driven by financial distress. But despite this driver, and after some high profile business failures in late 2008 / early 2009, what has been surprising is how few bank-driven transactions have occurred since then.
The banks' ongoing support to businesses has set the latest recession apart from others; however with bank focus on supporting their existing customer relationships the availability of new debt was greatly reduced. Pressure from the government on the banks – in particular those where it is the majority or key shareholder – has improved lending more recently, with real and positive consequences.
The final piece in the jigsaw is the attitude of vendors. A lack of supply of high quality businesses for sale has meant that those deals that were in the market have commanded premium multiples. This can be seen in the Private Equity Price Index (PEPI) which has shown an increase to 13.3x from 12.0x in Q4 2009. The prices paid for private companies have remained broadly flat for the third quarter in a row. The PCPI, which tracks price/earnings multiples paid by trade buyers for private companies, is at 12.0x compared to 11.9x in Q4 2009.
What this means is as prices remain stable for extended periods, vendor and purchaser price expectations narrow, finally unlocking the supply of companies for sale. Clark expects that the fruits of this improved situation will soon appear: "The continued improvement in the availability of debt coupled with a stabilisation in pricing leading to an alignment of vendor and purchaser expectations looks set to bring a significant supply of attractive businesses to the market…it is anticipated that an improvement in deal numbers will be seen towards the end of 2010.”
You can download BDO's PCPIs here.
