Post-Crunch M&A

April 21, 2008

No matter how challenging the deal market becomes, it’s a sure bet there will be folks, funds and firms who find ways to benefit from the down cycle. (In fact, you can hear from some of them at our June event on Post-Crunch M&A.)

Restructuring firms are chief on the list of beneficiaries, since economic slowdowns tend to expand their pool of potential clients. Talk to firms like Alvarez & Marsal and FTI Consulting, and they’ll tell you they have more clients than they can handle these days, which is a problem most of us would love to have.

Among the list of not-so obvious beneficiaries—at least within the mid-market—are private equity firms willing to increase their equity contributions. History has shown, and conventional wisdom would support that firms who are willing to invest in down cycles generally come out of those cycles in better shape than counterparts who sit on the sidelines. Of course, it’s tough to know how long the current downturn will last, but a financial buyer who buys now and can afford to be patient has a good shot at turning a big profit a few years down the road.

Small companies who price their assets to sell should also do well in the current market. My numerous talks with small market participants at the recent ACG InterGrowth conference only confirmed what most people had been telling me leading up to the event: The smaller the deal, the less impacted it is by Scrooge-like lenders. Another thing helping small deals is the creep down market by mid-market buyers who can’t get bigger deals done as easily anymore but still need to put money to work.

But without question, getting deals done post-credit crunch is no easy task. Due diligence is going the way of the tortoise, limited partners are asking more questions of their GPs, and even some strategic buyers are more gun-shy, wondering how long the current downturn with last.

Meanwhile, anyone who bought a company before Fall 2007 is now dealing with a new set of rules, forecasts and expectations. PE buyers have to determine whether to invest in their companies, stay ultra-lean until the downturn is over or, despite the blow to ego, cut their losses. More than deal sourcing, portfolio management is arguably the most important skill of any M&A buyer. Only those who can manage effectively through the current storm will circumvent the crunch.

Adam Reinebach, Publisher

P.S. Have something to say about M&A, the Paulson proposal, or how M&A can help Jeff Immelt improve his image? Merger Mogul is always looking for guest commentary. Just email me at adam.reinebach@sourcemedia.com.