Holman: Flight to Quality

June 11, 2008

The perennially-sounded mantra has reared up again in the mid-sized transaction world in 2008, a period not unlike the difficult 2001 time frame. The emphasis on quality businesses couldn’t be more important in this year’s middle market M&A auction pageant, especially given the credit and economic challenges hammering businesses of all sizes.

There is still a pall hanging over the M&A market. However, intermediaries in the mid-market segment say the transaction business is busier than ever. Seasoned investment banker Chris Williams of Harris Williams &Co., for instance, told an audience at an M&A Outlook Roundtable event in New York sponsored by the Richmond, Va.-based investment bank this past week: “We feel like we’re sitting in the middle of the busiest intersection out there.”

It’s not exactly a bad sentiment, especially considering it comes from one of the most active investment banks in the market segment as we head into the seasonally slower deal season of summer. Perhaps equally encouraging is that the “flight to quality” translates into transactions continuing to be executed at attractive levels, Williams says, for middle market deals ranging from $50 million to $500 million. There was little doubt that the market turmoil the large cap private equity deal market experienced in the latter half of 2007 would eventually wash downstream, but the fact that debt financings for mid-sized transactions are still being completed at reasonable valuations—albeit at more restrictive terms and generally with more equity—bodes well for deal brokers. So, does the politically-derived notion that taxes may increase in 2009 or 2010, which many expect will only fuel additional transaction activity in the remainder of the year.

Yeah, yeah. I know. These notions sound about as fresh as the age-old expression “too much money chasing too few deals.” We’ve heard them all in the last few months.

But, consider the news of dire natural phenomenon that seems to break almost daily. Devastating earthquakes displace, not to mention kill, thousands. Massive tornadoes rip apart rural towns and metropolitan areas. When it comes to dealing with man-made credit storms and financial crises, which certainly are more attractive, though not painless, than managing the fallout from Mother Nature’s wrath. So, on that note, maybe it’s just not such a bad thing to keep a little perspective and, well, be mildly optimistic when it comes to the prospects for middle market M&A dealmaking in the remainder of 2008. 

Kelly Holman
kelly.holman@sourcemedia.com