September 29, 2008

Interesting Times, Huh?

John Jenkins, Calfee, Halter & Griswold LLP

As the financial markets careen from one crisis to another, it’s hard to find any good news to report about the deal economy. M&A volume is down, and it’s down a lot. According to data from Dealogic quoted in the Wall Street Journal’s Deal Journal blog, the volume of M&A deals plummeted by 63% in August, led by a whopping 77% decline in U.S. deal volume. For the year to date, global deal volume is off 29%. While August is usually a slow month, it is worth noting that the Dealogic data indicates that August 2008 deal volume was 31% lower than that recorded in August 2007

If you’re looking for a ray of sunshine, here’s the best I can do – although middle market activity isn’t as robust as it has been in recent years, conditions don’t appear to be as bad as they are in the large cap M&A market. I spoke with Dave Dunstan, a managing director at Cleveland’s Western Reserve Partners and an experienced M&A investment banker.

Dave and his colleagues point out that while middle-market M&A is clearly softer than during 2006 and 2007, it is still happening at a level comparable with earlier years, and the further on down the food chain you get, the more robust activity becomes.

For example, based on an extrapolation of the first seven months of 2008, Western Reserve expects that slightly less than 900 transactions in the under $75 million segment of the market will be completed during the current year. While that number would be down more than 20% from the 1,137 transactions completed during 2007, it would be roughly comparable to the 924 transactions completed during 2006 and significantly higher than the 517 transactions completed in 2005.

In Western Reserve’s view, the lower end of the middle market’s resilience is due to the fact that despite the credit crunch, there’s still $400 billion of financial sponsors’ committed capital that needs to get put to work. The current credit environment has helped direct this money into smaller deals. Putting together bank syndicates has become a very dicey proposition, so private equity sponsors and foreign buyers have increasingly looked to smaller deals, where bank syndicates are not necessary.

Whether activity in smaller deals holds up in the face of the current crisis is anyone’s guess, but the relative resilience of the smaller end of the M&A marketplace is an encouraging sign in a year that hasn’t given anyone involved in the deal market much to smile about.