M&A Outlook Graziadio Alumni Network May 19, 2011 John K. Paglia, Ph.D., CFA, CPA Associate Professor of Finance Senior Researcher, Pepperdine Private Capital Markets Project
Oct 21, 2014
M&A OutlookGraziadio Alumni Network
May 19, 2011
John K. Paglia, Ph.D., CFA, CPA Associate Professor of Finance
Senior Researcher, Pepperdine Private Capital Markets Project
• What is cost of capital for privately-held businesses?
• The project launched in 2007; first report in July 2009
• We now survey 12 segments semi-annually
• Survey asks about firm profile, behavior, returns, view of next 12 months
• Next report to be released within two weeks
• Certificate in Private Capital Markets
Pepperdine Private Capital Markets Project
What is the Status of Privately-Held Businesses
as of Spring 2011?
What are Owners Focusing on Today?
• Nearly 95% of business owners report having the enthusiasm to execute growth strategies
• Yet just 53% report having the necessary financial resources to successfully execute growth strategies
State of Financing
• How much senior leverage is available for transactions?
• How much junior leverage is available and what are the total debt thresholds?
• How much equity is available for growth capital and transactions?
Capital Access Drives Valuations and Deal Flow in the Middle Markets
Median Deal Multiples by Financial BuyersInvestment Banker Survey (Spring 2011)
Industry$1M
EBITDA
$5M
EBITDA
$10M
EBITDA
$15M
EBITDA
$25M
EBITDA
$50M
EBITDA
$100M
EBITDA
Service 4.0 5.0 6.0 7.0 7.0 8.0 12.0
Mfg. 4.0 5.0 6.0 5.3 6.0 7.0 10.0
Retail 3.5 5.0 6.0 7.0 6.0 7.5 8.5
Wholesale 4.8 5.3 3.3 4.0 6.5 7.0 8.0
Distribution 4.3 5.3 5.0 4.5 5.3 6.5 6.0
Oil and Gas 4.5 4.0 4.0 5.0 6.0 7.0 NA
Restaurant 3.0 3.0 3.5 4.0 6.0 6.0 NA
Healthcare 5.0 6.5 6.8 6.0 6.0 7.0 7.0
Technology 5.0 7.0 8.0 9.0 8.0 10.5 9.0
Media / Ent. 5.5 5.5 4.0 7.0 7.0 8.0 7.5
Average 4.4 5.2 5.3 5.9 6.4 7.5 8.5
Business Transfer Intentions (Spring 2011)
Business Transfer Timing (Spring 2011)
Insights from Investment Bankers
• Deal flow has increased slightly
• Leverage multiples have improved slightly, as have deal multiples, particularly for later-stage companies
• Due diligence efforts by banks and buyers have increased
Compared to Six Months Ago
40% of Business Sale Engagements Expired Without a Transaction
Valuation Gaps for Non-Transacted Engagements
Difficulty Securing Senior Debt?
Very
difficultDifficult
Somewhat
DifficultNeutral
Somewhat
EasyEasy Very Easy
%
Difficult
$1M EBITDA 41.3% 27.3% 19.8% 8.3% 2.5% 0.0% 0.8%88.4%
$5M EBITDA 12.7% 14.4% 33.9% 23.7% 10.2% 1.7% 3.4%61.0%
$10M EBITDA 6.6% 10.5% 15.8% 25.0% 27.6% 11.8% 2.6%32.9%
$15M EBITDA 5.8% 5.8% 19.2% 19.2% 28.8% 19.2% 1.9%30.8%
$25M EBITDA 6.5% 4.3% 17.4% 21.7% 19.6% 21.7% 8.7%28.2%
$50M EBITDA 11.4% 5.7% 5.7% 20.0% 28.6% 14.3% 14.3%22.8%
$100M+ EBITDA 12.9% 6.5% 3.2% 25.8% 22.6% 12.9% 16.1%22.6%
Balance of Capital with Opportunities Companies worthy of
financing GREATLY
exceed capital available
Companies
worthy of
financing exceed
capital available
General balance
between companies
worthy of financing
and capital available
Capital available
exceeds companies
worthy of
financing
Capital available
GREATLY exceeds
companies worthy
of financing
Score
$1M EBITDA 28.6% 37.1% 20.0% 11.4% 2.9% -0.8
$5M EBITDA 13.2% 30.9% 32.4% 17.6% 5.9% -0.3
$10M EBITDA 5.7% 17.0% 39.6% 24.5% 13.2% 0.2
$15M EBITDA 4.9% 22.0% 29.3% 31.7% 12.2% 0.2
$25M EBITDA 6.3% 15.6% 31.3% 18.8% 28.1% 0.5
$50M EBITDA 13.8% 10.3% 13.8% 31.0% 31.0% 0.6
$100M EBITDA 18.5% 11.1% 14.8% 22.2% 33.3% 0.4
> $100M EBITDA 14.8% 11.1% 14.8% 11.1% 48.1% 0.7
Top Issues Facing Privately Held Businesses (Today versus Emerging)
Today
Emerging
• Business owners are more optimistic, back to focusing on expansion, and looking for exit opportunities
• Capital availability is robust for larger companies, still a concern for smaller ones
• Deal market active for larger companies, improving for smaller ones
M&A OutlookThe Road Ahead
John K. Paglia, Ph.D., CFA, CPA
Associate Professor of Finance
Senior Researcher, Pepperdine Private Capital Markets Project
bschool.pepperdine.edu/privatecapital
Thank You!