Behind Curtain No. 2
Scores of articles have appeared in recent months about the cascading declines in the overall M&A deal market and the rather gloomy future for mega deals. Much less has been written about our end of the market and what is really going on in transaction sizes below $250 million.
So what is going on behind curtain No. 2? GF Data Resources, a firm dedicated to accurately reporting on this market segment has analyzed 500 transactions as reported to it by 69 private equity firms and provides a treasure trove of data for more than 100 NAIC subcategories. Their recent press release confirms what we would surmise: First-half M&A was more robust than second-half.
Yawn.
But then the data gets interesting. Deals continued, and continue, to get done. Average multiples in the second half of the year declined from a high of 6.5x in the first half to 6.0x. In the $10 million to $25 million deal size, there was no depreciable decline, holding at 5.7x. Now this is an important stat. As this end of the middle market never got away from itself, it never saw much of a correction. As you move up the transaction scales, the correction becomes more apparent.
In the $25 million to $50 million range, EBITDA multiples dropped from 7.0x to 6.0x, with a similar drop for deals in the $50 million to $100 million range. Publishing continued to attract the highest multiples, a whopping 7.8x, and business services came in on the lower end, at 5.9x.
Senior debt financing was readily available through banks and commercial finance firms, but leverage retreated from 3.4x to 2.7x, and total debt-to-EBITDA fell back to 3.5x. Although pricing spreads did expand, it was not the wholesale rout that was seen in larger syndicated deals.
As we continue to move along through the second quarter of 2008, middle-market dealmaking, unheralded and less flashy than its brassy brethren, reminds me of the children’s story, "The Little Engine That Could."
"I think I can, I think I can" is not a bad mantra for the hills ahead.
