Outlook 2009: Deal volume predicted to drop 25%; new year a buyer's market for companies with cash

By Cristal Cody

New York, Dec. 31 - It's cold outside and likely to get colder in 2009 for mergers and acquisitions - unless you've got cash.

In fact, the outlook for the new year is dimming fast for those without it.

"Cash and cojones" will be needed to navigate deal-making throughout 2009, said James Marra, business development director for private equity firm Blue Point Capital Partners in Cleveland.

The firm experienced a 30% drop in deal outflow in the last three months of 2008, Marra said while speaking at a conference on mergers and acquisitions.

Across the globe, more than 1,100 deals were canceled and the volume of mergers fell 29% to $2.89 trillion in 2008 compared to the same period in 2007, according to data from Thomson Reuters.

The volume for U.S. activity fell 38% in 2008 from the year earlier.

The new year looks bleak indeed, if predictions from Bernstein Research pan out.

The firm predicts the number of deals will continue to fall another 25% in 2009, followed by a 15% drop in 2010.

"The large number of deals coming to market have slowed dramatically in the last quarter," Thomas Littman, managing partner at Kirtland Capital Partners, said during the conference on managing mergers and acquisitions held by the Turnaround Management Association.

"The quality of the deals is declining, in part because investment bank brethren in the market are talking to clients and telling them to defer the decision to come to market."

The volume of deals by private equity firms and other financial sponsors fell 72% - a five-year low - in 2008, according to Thomson Reuters data.

The volume of mid-market deals, those under $500 million, fell 16% to $569.6 billion.

"Middle market deals were getting done because they were not as dependent on securing debt. But as credit has dried up, we have seen fewer and fewer private equity transactions," Tom Freeman, president of ACG Cleveland and a partner in the M&A Transaction Advisory Services Group, said in a statement.

LBO demand falls

Deals larger than $100 million relied too much on the credit markets to be practical under current conditions, with lending expected to remain tight into 2009.

Most of the mega deals struck in early 2008 "really don't make sense for today's market," a source said.

In fact, several deals already agreed fell apart along with the financial markets.

Among the companies which saw deals collapse in late 2008 were Huntsman Corp., which terminated the $6.5 billion buyout by Apollo Management's Hexion Specialty Chemicals Inc., and Canada's $28.3 billion leveraged buyout of BCE Inc., which fell apart in December after the company failed to pass a solvency test.

Leveraged buyouts probably won't make the news too often in 2009.

LBOs in the United States made up only 4% of total volume in November 2008, according to data from Dealogic. Less than $3 billion of leveraged buyouts were announced that month, well off the $116 billion announced in May.

"I think it will pick up much better than 2008, but it won't be back to the old days where LBOs are coming every Monday," said William Lefkowitz, an options strategist at brokerage firm vFinance Investments in New York.

"The capital is not there," he said. "I don't think that's going to pick up anytime soon in 2009 because the banks that did the lending are still licking their chops and are not going to jump back into that area for awhile, plus they're still digesting all the other deals that were done over the last couple of years."

Restructuring to drive bank sector

The nation's banks will continue to face upheaval with mergers and acquisitions expected to pick up in 2009 as part of the continued financial and economic fallout.

In late December, shareholders approved two bank acquisitions brought out about by the credit crisis.

PNC Financial Services Group Inc. will acquire National City Corp. for $5.6 billion that was financed in part from the government's $700 billion bank bailout program, while Wells Fargo & Co. will take over Wachovia Corp. for $11.8 billion.

Thomas Alonso, an analyst with Fox-Pitt Kelton, said he expects to see more forced bank consolidations in 2009.

"I don't think there's going to be a great deal of traditional M&A deals," he said.

"The deals are going to be where the regulators force someone to sell themselves or get involved," he said. "A lot of banks are interested in doing FDIC deals. I can't seem them going out and doing traditional acquisitions when they can just wait until someone in their backyard fails and they can pick them up cheap."

Buyer's market in 2009

The new year could prove to be a great buyer's market.

Financial services, healthcare and life sciences and manufacturing and distribution sectors hold the most promise for deals in the first six months of 2009, sources said.

The greatest obstacles for activity in 2009 are the obvious credit crunch combined with the weak economy.

"The more flexible buyers and more flexible and creative sellers are the ones that will get deals done in 2009," Littman said. "We fully expect the transactions in 2009 will look like the transactions we were able to do in the early 2000s when prices for businesses were a little bit cheaper."

Woodbridge Group Inc., a global mergers and acquisitions firm, said deals can still get done in 2009 at attractive prices for companies with $5 million to $50 million in revenues.

The firm said it was able to complete three sell-side transactions in the lower to middle markets in the last three months of 2008 despite the economic fallout.

"Several private equity firms have directly told our transaction professionals that the single largest problem right now is finding a flow of good companies to buy, or in which they can make a substantial growth investment," Woodbridge said in a statement.

Sun shines on restructuring, debt reduction

Sun Capital Partners Inc. expects most deals in 2009 will be for restructuring or add-on acquisitions to enhance a particular company, Michael Fieldstone, a principal of the Boca Raton, Fla.-based private investment firm, said at a business conference.

Sun Capital invests in companies with $50 million in revenue and up.

"We're focused on turnaround or underperforming situations, so it's an interesting time for us," he said. "Just like the '90s, we have to go back and figure out how to actually improve companies. The M&A opportunity is going to be more in terms of restructuring and reducing the debt level or changing the terms."

On the other hand, Kirtland Capital Partners is actively scouting for transactions, Littman said.

"We're looking at manufacturing, service and some distribution companies," he said. "There are a lot of opportunities to make good acquisitions in the next couple of years."

In fact, deals are out there for companies with decent cash positions, Lefkowitz said.

Johnson & Johnson started takeover offers of two smaller companies in December's weak environment, while InBev NV was able to complete its $52 billion takeover of Anheuser-Busch Inc. in November.

"This is really when you want to take over companies, not when the market is skyrocketing," Lefkowitz said.

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