From the peak of 2007 through the end of 2009, M&A transactions dropped by one-third in number and 40% in both volume and pricing. North American private equity purchases declined 90%. It is thus fair to ask what these trends imply for 2010, and I think the answer is: "A little better than 2009, but not a rapid resurgence."
2010 will feature areas of strength such as outbound activity by Indian and Chinese corporates, as well as by cash-rich strategic buyers, and debt restructurings/refinancings will continue to address debt maturities and excessively high leverage, but the lack of debt capital, new equity for real estate and confidence prevailing in North America and Europe suggest relatively low absolute levels of activity. Private equity faces particular challenges as long as bank lending sputters and weaker sponsors close, leaving their industry to the very large and relative newcomers. Sales of sponsor portfolio assets seem likely as 2010 progresses.
When thinking of where activity will or will not occur, it is helpful to consider both country and industry-specific criteria which include:
1) basic economic strengths and weaknesses,
2) confidence levels of senior corporate and financial executives,
3) availability of debt and equity capital, and
4) regulatory clarity and priorities.
Where should the market continue to be bad?
With the United States and much of Europe still in recession, confidence levels low and bank debt less available than before, it is difficult to predict robust general or resurgent private equity acquisition activity in 2010. Purchases of distressed debt attached to real estate, retail and media properties will occur, but there is not yet enough new equity or debt to recharge valuations. A few banks now lend to a 5x total leverage EBITDA multiple, but not the 7x-plus of the peak. Needs to rebuild balance sheets, political stalemate, large deficits, regulatory uncertainty, increased emphasis on anti-trust and misplaced efforts to "fix" executive compensation are all significant negative influences on both business fundamentals and confidence. Some private equity firms, hedge funds and corporates have significant purchasing power, and will try to act from their positions of comparative strength, but North America and most of Europe are fundamentally still in recycle mode.
And where will activity be stronger?
If you have read this far, you know that the answers will include geographies and...