Unfortunately I was not able to attend Intergrowth this year. For those not familiar, Intergrowth is ACG’s (Association for Corporate Growth) premier national event. In speaking with a number of attendees over the past week, there was varied feedback and perspectives. In general it sounds like there is real excitement about 2010 and the outlook for getting deals done. Demand is being driven by expected changes in the tax code, by the need for private equity investors to deploy capital, and by strategics with a lot of capital seeking top-line growth that can not be met organically. Champ Davis of Davis Capitalsums it up – “the deal market is back …first quarter was strong and there is significant pent-up demand by both financial and strategic buyers”. There does seem to be a question as to what will happen in 2011 and how the credit constrained debt market will impact the actual deals closed.
Carolyn Saacke, Managing Director, Capital Markets for NYSE Euronext, spoke at our NFA meeting yesterday in the Raleigh, NC. The group enjoyed hearing her remarks and views on IPO activity and what’s been happening in the market. One of the notable items for me was the performance of the IPO market last year. In reading the press and listening to the media, I thought the IPO market was closed and was miserable; not so. There were nearly twice as many IPOs in 2009 as 2008. There were 59 IPOs last year which is about half the annual average since 1990 (excluding 1999 & 2000 each with about 330). The main reason for the improvement was discounted pricing below target of some very good companies. She says the indicators are good for this year, but still not as robust as they expected entering 2010.
I didn’t realize the breadth of global capital markets access through their exchange. With the consolidation in the exchange market and the acquisition of a number of platforms in Europe, the NYSE Euronext provides access to capital in the US, Europe and the Middle-East. Not just for the S&P 500 , but also for emerging growth and middle-market companies seeking capital of at least $40 million; the minimum market cap is now $150 million. This puts the NYSE directly competitive with NASDAQ in most capitalization segments …providing liquidity and greater global reach.
It is encouraging and exciting to see the markets rebounding; especially for mid-sized businesses.
The winter conference of the Alliance of M&A Advisors finished today; it was well attended and I had a chance to catch-up with a some friends and industry participants.
The session on creative deal structures was interesting and thought provoking …most of the discussion was focused on distressed and tough situations. Here are a few bullets that I want to share based on the panel’s views –
1. A second wave of bankruptcies is likely in 2010 by companies needing to de-lever (with many companies having sales of 40-60%).
2. Interesting enough, the perspective of banks has moved from getting out of bad deals to one of restructuring tough loans to avoid further write-offs.
3. Banks in problem deals are looking for more equity in those deals (no surprise), mezzanine investors are looking to preserve value, customers are seeking continuity of supply and willing to invest, and employees are being flexible in compensation arrangements.
4. It is difficult to value investments by PEGs in distressed deals because of the back-loaded structure of deals with cash and equity earnouts. It was suggested that the approach to evaluating potential deals is to look at the likely value of positions 3-5 yrs out if the deal works.
5. Bankruptcy is too expense for many …there is an increase in out of court deals: (1) assignment for the benefit of creditors and (2) friendly foreclosures. Both of these tend to washout unsecured debt. Prepackaged bankruptcies are moving very quickly; now measured in weeks vs. months.
6. Lender liability seems to be less of an issue given the past five years of litigation and precedences set.
In recent weeks I’ve been meeting with lenders, advisors and some CEOs involved in funding small and medium sized businesses (SMBs); also surveying the market for what we are likely to see in Q1 relating to the same. In summary – It continues to look tight.
Asset based lenders have been a fall-back resource for many firms with constrained credit from traditional bank credit facilities. In the ABL market, there appears to be a retrenching of players, with some closing offices and pulling back into their traditional geographic footprint. On the positive side, it appears that some deal terms (though minor) are easing i.e. removal of interest rate floors. On the constraint side …I haven’t found many ABLs yet willing to fund operating companies with negative cash flow …even with a good story and lots of solid collateral.
Given the potential positive impact that small companies have historically had in creating jobs and the gloomy mood of of small business owners (as Jim Smith shared in his December Economic Outlook www.econforecaster.com), we must continue to find alternatives and creative ways to finance operations. In that vein, this month our governor (of North Carolina) formally requested actions from the federal government to loosen credit and increase funding for SMBs. Among other actions, she encouraged extension of the 90% no-fee loans from the SBA and repurposing of TARP funds.
The most obvious disconnect that must be fixed for the banks to ease credit is alignment in how regulators are controlling bankers by forcing tighter rating of loans and the administration’s message and direction of creating liquidity. Even our Treasury Secretary Tim Geithner had no real solution when confronted in an interview on NPR yesterday.