M&A Special Circumstances

With private equity firms less able to pay top dollar for companies, sellers are less eager to part with their firms—particularly when they remember what those firms might have sold for two years ago. “There is a gap between what sellers consider a reasonable value for their business, and what buyers are willing to pay,” D’Aquila says.

The combination has private equity firms spending time working to manage and improve existing portfolio companies, or sometimes to restructure existing deals. Though some private equity buys still happen, the group as a whole has taken a back seat to strategic buyers.

Pockets of Activity

Sellers who can wait are often sitting tight, declining to sell until valuations recover. “Sellers who are in no hurry have no reason to sell,” says Bruce Engler, head of the M&A group at Minneapolis law firm Faegre & Benson, LLP. “They’ll wait until things get better.”

Some business owners, however, are motivated to sell. A few have health or family issues. Many are concerned that their firms won’t survive the current economic downturn unless they sell. “These are companies selling from a position of weakness,” Engler says, adding that such firms can change hands for as little as two times EBITDA.

Other business owners have little choice about selling. “If it’s a public company, the board of directors have to sell if they think it’s in stockholders’ best interest,” says Ivar Sorensen, managing partner of The M&A Group, a private investment bank in Minneapolis.

Or the firm could be the target of a hostile takeover, an increasingly common possibility in light of significantly reduced stock valuations, says Mike McFadden, co-CEO of Minneapolis-based private investment bank Lazard Middle Market.

When deals do take place, the buyer isn’t always a private equity firm, as was so common in the past few years. Instead, strategic buyers are once again the most competitive and active buyers of other firms.

“Corporate players are better able to make strategic investments now because the competition from the private equity firms has been tempered,” Sorensen says. “Corporations are sitting on huge amounts of available capital. They had a long run of very profitable operations, up until recently. Some have reported huge losses in 2008, but those aren’t always cash losses—they can be write-offs of intangible assets such as goodwill, which has no impact on cash flow, and may even help cash flow by reducing tax liability.” That puts them in a great place to buy.

Strategic buyers are typically looking for a bargain, says Cliff Allen, vice president of business development at Minnetonka-based Packard Acquisitions, which finds businesses that meet prospective buyers’ requirements. “People are looking for deals, for good properties that are undervalued,” he says. They hope to pay a price equal to perhaps four times an acquisition’s EBITDA—saving two to three multiples compared to what they might have paid in 2007.