Agile Equity: Press

Dealmakers Return to the Front Lines as Market Volatility, New Fears, Dramatically Alter the Global Economic Landscape

The Mergers & Acquisitions Advisor - September 30, 2001

Cautious acquirers are telling investment bankers they are still in the market.

Business Won't Return to 'Normal' Any Time Soon

Opportunities Emerge for Well-Positioned Buyers

Perhaps the best description of the landscape for mergers and acquisitions activity in the months ahead can be found in the ancient Chinese symbol Yin and Yang. Loosely translated, it means that within opportunity there is danger, and within danger, there is opportunity.

Appalled by the terrible tragedies of Sept. 11, saddened by the loss of friends and colleagues, and apprehensive about the unprecedented economic waters ahead, dealmakers are looking for ways to heed the call to resume business. While the nation is shocked and scarred, new economic realities give rise to opportunity. Moving forward means picking up the pieces and starting over.

Investment bankers we talked with say there were a number of deals in the works on Sept. 11, and most expect those deals to go forward after some delay. There are plenty of sellers out there, and some good targets as well - cash-flow positive companies with good balance sheets. Acquirers, while cautious, are telling investment bankers they are still in the market, according to Elliot Williams, president of Boston-based RCW Mirius Inc.

Opportunities Amid the Tragedy

Companies need to move cautiously, and to be especially sensitive to the concerns and respectful of the emotions of those affected by this tragedy, dealmakers agree. But as we near the end of a year that has been fraught with uncertainty, the time may have come for smart buyers to make their move. "You'll see companies making their greatest strategic moves during these periods," said David Cummings, managing partner at Agile Equity, a New York-based boutique investment bank that specializes in technology deals. "Some companies that are very well disciplined only acquire during these types of down markets. For the right company that has its internal house together, has a history of successfully identifying targets, an M&A program or process that is able to identify, value, assess, structure and integrate targets, there are some great opportunities."

For the economy to get back on its feet, companies will have to continue to find ways to grow. "The fundamental mandate of business executives is to continue to enhance shareholder value, and M&A is a strategic tool that is used by most business leaders," notes Phil Harris, president of Alterity Partners, a middle-market investment bank in New York. While volatility and concerns about the future may slow some deals down, "I think deals will continue to get done."

"I just met with a plastics company that's very interested in doing acquisitions in this time period," said Williams. "They were out there looking two years ago, and they couldn't find anybody that was willing to take less than 7 or 8 times EBITDA. Now we're seeing 4 to 5 times EBITDA. This is the type of market where they can do some acquisitions and very smartly grow strategically. So we're actually seeing the players that have some cash flow and good strategic foresight starting to move into the market now. "

While a bunker mentality appears to exist in those market sectors most directly affected by the attacks - specifically airlines, insurance and travel firms - there are opportunities in many other sectors. Deal announcements resumed in the week following the attack, and appeared to be picking up speed toward the end of September.

Volatility Impacts Deals

Since March of 2000, one of the questions that has contributed to the slowdown in M&A activity has been, "where's the bottom?" Buyers were having initial conversations, "kicking the tires," as one investment banker put it, but stopping short of doing deals, waiting for more favorable pricing. The events of Sept. 11 and the resultant shock to financial markets has given many sellers who were holding out for valuations near those seen at the height of the technology bubble a much needed reality check, observers say.

Market volatility makes it exceedingly difficult to settle on a fair price, and as some of the examples noted below demonstrate, that can kill a deal. "Time is the enemy," notes Harris. The longer it takes to complete a deal, the better the chances it will not close. Harris thinks most buyers would like to see the public markets settle into a consistent trading range for two or three months before they're truly comfortable with a price. "There's no short-age of sellers," he agrees.

However, if the deal makes sense strategically, a buyer might not be so concerned about price volatility, Williams said. After being under pressure for so long, some feel it's time to move. If the risks are manageable, and there is value in the deal, the buyer might say, "I'm looking at my pro-forma competitive position and I'm looking at the operating synergies and so I'm not going to worry about the stock price quite as much."

"The deals that we've got active right now have particu-larly compelling strategic stories and the clients on both sides are just looking to get it done because they make a lot of sense," said Greg Benning, co-head of the M&A practice at middle-market investment bank Adams Harkness & Hill in Boston. "I think deal-making in volatile markets is going to be a fact of life that we're all going to have to figure out how to deal with."

Capital is Still Tight

One thing that does not appear to have changed is the availability of deal financing. Even when the deal makes sense, it can be tough to find the money. Companies in market sectors that have been consolidating are hit particularly hard, according to Cummings. "A lot of companies are still grossly undercapitalized. Obviously, the markets are very tight, both from the credit side and the IPO markets are closed. We're having some problems when it comes to finding the currency to actually fund and consummate transactions," he said. As The Mergers & Acquisitions Advisor reported in July, senior lenders have largely stopped cash flow-based lending to middle market companies. And the capital that is available can be expensive. "All the mezzanine guys have basically run for the hills. What is out there is a lot of bridge loan financing and VC money, which usually has very onerous terms attached to it," Cummings notes.

"We had a couple of term sheets come in where we were surprised by the amount of (equity required)," reports Benning. "People were looking to address their return concerns by asking for more equity. In the senior market, enterprise-based lending for the middle market isn't there right now."

While he agrees that financing can be hard to come by, it is available, counters Malon Wilkus, chairman and president of buyout and mezzanine fund American Capital Strategies Ltd. [Nasdaq:ACAS]. In the aftermath of Sept. 11, Wilkus thinks lenders will likely be even more conservative, although he hasn't seen a trend to higher pricing of capital yet. "The terrorist acts may make it more difficult for private equity firms to raise capital," especially in a recessionary environment, Wilkus said. American Capital closed a $51 million round of financing just a week prior to the attack.

Europeans are Buying

The perceived impact of the attacks diminishes somewhat outside of New York City and the industries it directly affects, dealmakers say.

"My take on it is that Europeans think America was attacked; people in America think that New York City was attacked; and in New York City, the Upper West Siders think that downtown was attacked. It really depends upon on how far away from it you are," Cummings said. Agile's offices are just 15 blocks north of Ground Zero.

"More domestic companies are concerned than interna-tional companies," Cummings said. While U.S. companies are reassessing their strategies and trying to determine their next moves, "A lot of international or U.K.-based companies are still pretty aggressive. They're seeing a great buying opportunity that hasn't been around for probably five or 10 years."

A Reason to Renegotiate?

Drastic changes in the markets may offer some companies an opportunity to back out of deals that don't look as good as they did a few months ago. "Some companies, if they're between LOI (Letter of Intent) and definitive (merger or purchase agreement), are using this as an opportunity to renegotiate the deal," Cummings said. "They can do that because both the domestic and international scenarios have changed since the 11 th . A lot of companies can probably get out of their deals through what is known as a MAC (Material Adverse Condition) clause. If I am the potential acquirer, I'm going to come back and try to recut the key parameters of the deal."

Cummings cites the situation that advertising agency Tempus PLC landed in late September. France's Havas Advertising SA [Nasdaq:HADV] offered to buy Tempus, but let the bid lapse after Tempus convinced a third agency, WPP Group PLC [Nasdaq:WPPGY], to make a competing offer. WPP may be reconsidering the offer, Cummings said. "Now WPP has to make a decision whether or not they've overextended themselves in what appears to be a very aggressive pricing in a very difficult market. I wouldn't be surprised if you see them actually exit stage left, invoke the MAC clause, and not go through with the deal." Cummings thinks it's possible that more deals in the "red zone" between LOI and definitive agreement could be called off in the months ahead.

And shortly before press time, Cendant Corp. [NYSE:CD] appeared to be using that argument to rethink its $425 million offer for online travel agency Cheap Tickets, Inc. [Nasdaq:CTIX].

Dealmakers Are Flying Again

Another factor the dealmakers all agree on: They will continue to travel to do deals. It's a people-oriented business, they note. The week after the attack, Cummings drove to Boston to meet with a new client. "Nothing can beat the ability to get belly-to-belly," he said.

Benning braved the new world of airline travel the week the airlines were allowed to fly again. "I flew out to California on Wednesday night and caught a red-eye back. It was pretty strange because the planes were only half-full and the terminals were empty and the presence of security was really high. I think, maybe you ought to be asking the question: Should you be hopping on a plane, or can a phone call get the job done?"

"Do we think twice about it?" Williams responds, "Yeah. Do we do it? Yeah. I'm getting on planes and so is everybody else (at RCW Mirius)." He expects to increase his firm's use of travel-saving technologies, but they'll still travel. It's an essential part of the business.

While corporate management may be reluctant to travel, especially early in the process, investment bankers still have to travel, Harris agrees. "A face-to-face meeting is the most effective way to get a deal done. The bankers, at least in my firm, will continue to travel."

Technology offers some tools, such as video conferencing, online data rooms, and online presentation tools that can reduce some of the need to travel. And dealmakers might try to wrap more meetings into each trip to cut down on the travel. But all agree that it's always best to cut the deal in person.

Tough for Some M&A Firms to Survive

The year 2001 was a tough one even before the events of Sept. 11. Financial firms already suffering from lower deal volume now have the added effects of a volatile market and a lengthening timeline to complete deals in. There have already been layoffs in the investment banking industry, and some small, boutique investment firms and even some venture capital companies have closed their doors. In recent months, corporate acquirers have trimmed back their internal venture and deal-making units, too. "More layoffs are coming in the M&A world," predicts Alterity's Harris. "Some of the smaller firms are going out of business, because they don't have the capital to get through a downturn."

But, the experts say, deals are getting done. All the firms we interviewed said dealflow was good, that they were busy trying to complete deals that were on the table before Sept. 11. The marketplace has changed; the need for mergers and acquisitions as a key corporate growth strategy remains.

"Good, profitable companies are being acquired for good prices by other good companies," Cummings notes. "Things were difficult before the 11 th , and they're a little more difficult now, but we remain optimistic."