We recently attended a meeting wherein some of the savants of the middle market domain held forth on the outlook for mergers and acquisition this year.  The panel, sponsored by the Association for Corporate Growth, featured comments by Tom Dippel of Houlihan & Lokey, Murray Beach of TM Capital, and Didier Choix of DDA Company.

Tom Dippel noted that the market had begun to get its sea legs after falling out of bed in 2008 and 2009.   The markets proved yet again that the end of the world is notoriously unreliable.    He observed that his markets have a reasonably healthy tone, aided by historically low borrowing costs for investment grade acquirers, who have, themselves, had a meaningful cash buildup.  Transaction multiples are approaching the previous cycle peak, as are leverage multiples.   There are some market pressures too, he noted, in the form of uncertainty on a macroeconomic and geopolitical level, which just about covers everything.  Additionally, the capital markets were somewhat less friendly to lower quality credits.

Murray Beach of T M Capital commented that he was seeing an expansion in cross-border traffic.  The rise in acquisition interest by foreign acquirers in the United States is matched by the interest in overseas acquisitions by American firms, suggesting that the global poker table is now in session.  Liquidity, or the lack thereof, continues to influence transactional business.  The extremely low cost of debt makes today’s market this an ideal buying market, in his view, and a resilient stock market  improves the ability to execute on the exit.  He also made a couple of anecdotal observations: there is a serious interest in cloud computing, and it’s getting a lot harder to find talent.

We asked Murray about the most common mistakes he saw on the part of financial and strategic buyers.  He said, “The most common mistake I see financial buyers make over the long run is that they wait too long before they get interested in a sector.  For the most part, they seem to be in a sector after the initial move has taken place, and therefore they leave substantial ROI on the table.   The most common mistake I see strategic buyers make is in their integration of acquisitions post transaction.  Even companies which do integration planning at the time of the acquisition tend to under estimate and under manage the challenges the new entity will face in integrating with the parent.”   We suppose that means that a lot of financial buyers may be closet technical analysts, waiting until they see technical breakout everyone else can see before making a fundamental analysis type of investment.

Didier Choix of the eponymous DDA Company spoke a bit more about his home turf, Europe, noting that it was the best of times and the worst of times, a la Dickens, except that it related to deals and deal closure.  Liquidity was a prominent factor in a slower second half of 2011, as financial buyers became scarce.  He saw private equity funds being much more active on the sell side in Europe, and sensed that there is a wave of financial restructuring coming amongst the European financial private equity funds.  No doubt there will be non-European buyers who will appreciate have their own little corner somewhere in Europe.

Didier has been in position to see the two-directional deal flow relative to emerging markets. He noted that M & A has been moving east and south.  To show how dynamic the trend is, Europe, the US and Japan comprised about 80% of the deals done in 2006.  By 2010, they accounted for 63%. Further four countries are among the top five countries for acquisition targets and corporate acquirers:  China, Brazil, Russia and Mexico. There are a lot of hunters in China and Brazil, in particular, as acquirers look for investments that can maintain growth.  He cautioned about trying to do deals in Russia.   The home field advantage there can overwhelm the visiting team.