George Spilka & Associates

In my January, 2007, article entitled, “Acquisition Pricing Is At Record, But Unsustainable, Levels”, I stated that the current level of middle market acquisition pricing is not sustainable. Furthermore, I indicated that when it ends, the decline in pricing will be dramatic and current pricing probably will not be seen for 20 years. Despite the recent turmoil in the credit markets, it would be premature to think that the strong acquisition market has ended. The signs indicating the end are not yet present.

There is no doubt that certain factors have had an unsettling effect on acquisitions. These factors include:
1. The recent increase in the cost of financing,
2. The lending institutions’ reduction in the percent of the deal price they will fund, and
3. The overall reduction in credit availability.

However, it is quite possible these are only temporary problems. Within 1-4 months, credit availability to solid corporations and private equity groups for acquisition financing could return to the level of the last 2 years.

Responding to credit market conditions, many central banks made a massive infusion of liquidity into the financial markets last week. It appears the central banks will do whatever it takes to preserve a high degree of liquidity, as they apparently are firmly committed to preventing any long-term negative consequences to the global economy from capital availability and liquidity issues. Furthermore, the Federal Reserve might quickly institute a rate reduction. The world’s central banks appear to be the acquisition market’s greatest ally. As the central banks’ resolve in this issue becomes apparent, it could change the psychology of the market. This could open the acquisition financing spigots in the near-term.

The exact impact that the credit turmoil has had on the acquisition market is hard to quantify. Pricing of the “mega deals” appears to have deteriorated approximately 10-15% during the last month. However, the impact on middle market acquisitions (deals with transaction prices between $2-$250 million) has been considerably less. Furthermore, any impact on middle market acquisition pricing has generally been limited to deals involving a private equity firm. There has not been any discernable impact on deals involving a strategic acquirer, especially where the prospective seller was an experienced one. In fact, on transactions that my Firm has in process, I have not discounted the price expectations for any company. This has not diminished the interest of prospective acquirers.

If you will be a seller in the near-term, don’t allow an acquirer, especially a strategic one, to use the current turmoil in the credit markets as justification for a significant deal price reduction from the price levels realized during the last 2 years. Any downturn in deal pricing might be reversed in the next 1-4 months. Correspondingly, hold firm to your pricing expectations, until it is proven the credit market problems are long-term ones.

I believe the credit market problems impacting quality acquirers merely reflect the market’s overreaction to the problems of the sub-prime credit market and the hedge fund industry. These industries’ problems are not likely to have a significant impact on the financial results of substantial companies (and acquirers) not directly involved in those industries, the overall economy, or middle market deal pricing 3-4 months from now.

When the bull market conditions for the credit markets, and correspondingly acquisition financing and pricing, end, it will be characterized by a substantial, dramatic decrease in acquisition prices. Even the current overreaction of segments of the acquisition market has not produced a dramatic reduction in acquisition pricing. Until that occurs, the savvy seller will hold firm in his pricing expectations, realizing there is a strong likelihood that his maximum pricing objectives can still be achieved.

My investment banking firm is monitoring the credit market conditions and acquisition pricing as closely as possible. If there is a change in our perception of middle market acquisition conditions, it will be brought to your attention immediately in this magazine.

If you have any questions or information needs regarding acquisitions, deal pricing, or the impact of the credit markets, please feel free to contact me at spilka@georgespilka.com or by telephone at 412-486-8189. If you prefer to reach me through this periodical, please specify your question or information needs at the appropriate place on the magazine’s web site. I will respond promptly.