27 Nov M&A Activity Accelerates
A recent survey conducted by the Alliance of Merger & Acquisition Advisors (AM&AA) shows deal volumes accelerating. Their bi-annual survey of U.S. M&A advisors shows deal volumes up 19% in the first six months of 2012, compared to same period in 2011. Benchmarked to the first six months of 2009, closing were up a full 85%.
This is not surprising due to the recession. Revenues and profits were down in 2009, and in recovery in 2010, and business owners generally don’t make themselves available for purchase when their businesses are performing poorly.
EBITDA multiples are generally down from 2009 and 2010, which can largely be attributed to company earnings being lower in those years. So, what might seem at first glance to be lower prices being paid to business owners, the prices are likely much higher as most companies earnings are considerably higher in 2012 vs. 2010 and, most certainly, 2009.
This is because poorly performing companies can obtain higher multiples as “the balance sheet matters.” Yes, “going concerns” are valued largely on their proven income stream (cash flow stream, to be more precise, but the industry uses EBITDA as a surrogate because such his much easier to calculate), but companies with higher revenues and/or significant assets relative to their income streams can attract buyer candidates that pay higher multiples. Even so, the overall prices are in most cases low when compared to what could have been if current and recent earnings were at “normal” levels.
As always, size matters. Larger companies generally garner higher earnings multiples. The study shows reported EBITDA multiples generally in the 5x range, give or take a turn either way.
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