As we closed out 2009 and slid into 2010, a number of pundits, including many agency-brokerage executives and investment bankers-consultants, suggested 2010 would be an over-the-top, banner year for M&A activity. A few contrarians, myself included, suggested M&A activity would not roar back like gangbusters, but rather would take some time for the fundamentals to improve and momentum to return.
What, then, is the current landscape? Announced deals are a reasonable indicator of total M&A activity, although these only represent a minority of all transactions. Announced deals in 2009 (173 transactions) were down 40 percent from 289 such deals in 2008. Further, 2009 had the least activity since 2000. But events suggest that 2010 will not be the banner year and that we may actually see less activity than in 2009: note just 73 announced deals through June 30, 2010, compared with 89 deals through June 30, 2009.
Although shocking to many, this dearth of M&A activity is not surprising if you objectively examine the current environment. Frequently cited factors that some believed would drive a rebound in M&A activity included the scheduled 5-point increase in the federal capital gains tax rate to 20 percent, effective Jan. 1, 2011; the impact of healthcare reform; the fact that the frequent buyers sat on the sidelines in 2009 and that many sellers were waiting in the proverbial pipeline.
So what's creating this drag on deal activity? The contrarian view in 2009 saw the same factors influencing buyers and sellers. The active-buyer universe remains cautious due to three conditions: the sluggish economy and its corresponding impact on insurable exposures, the soft property-casualty market and uncertainty about the impact of healthcare reform on the employee benefits business. Further, although EBITDA multiples have remained reasonably constant now and over the past few years, the terms imposed by buyers are tougher, requiring sellers to deliver top- and bottom-line growth to hit the target multiples. The same factors influencing buyers have a corresponding but converse impact on sellers. Sellers see the landscape as likely better 3 to 5 years hence. By then, the thinking goes, the economy will have improved sufficiently, the property-casualty market will have hardened, and most uncertainty regarding healthcare reform will be gone.
Sellers have recognized the axiomatic impact of the economy and property-casualty market on their street value: a 20 percent decline in EBITDA drives a corresponding 20 percent decline in value.
Consequently, our opinion remains that absent a highly motivated strategic buyer or a compelling need to effect a transaction in the near term, it is probably prudent to delay going to market until 2013 or later. Values will likely be higher in the future, making the wait worthwhile.
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