A strong seller's market: manufacturing companies command a high price.

• Author: Brown, J. Jeffrey
• Position: REPORT / MERGERS & ACQUISITIONS

FOR THE PAST TWO YEARS, beginning around mid-2004, merger and acquisition activity in Indiana has been absolutely booming. No reliable figures for deal volume in Indiana are publicly available. However, at Baker & Daniels, we completed more than $5 billion in acquisitions in 2005 alone, our strongest year ever. Based on what we are seeing, here's a snapshot of what's happening now in the MEsA market in Indiana.

Driven by financial buyers. We are in the midst of a very strong seller's market. There are many reasons for this. Principally, the market is being driven by "financial buyers" (buyout funds, private equity funds, hedge funds, etc.) as opposed to "strategic buyers" (operating companies hoping to expand their existing operations or add complementary product lines). These financial buyers have unprecedented amounts of capital available to them today.

Since the slow stock markets of the early 2000s, wealthy investors have turned to buyout and other alternative investment funds in the hopes of achieving the higher returns they had earned before. Investors typically require these funds to invest their capital within three to five years or their commitments will expire, so the funds are eager to put their capital to work quickly. At the same time, banks and other debt sources such as "mezzanine" and "second lien" lenders have returned to the M&A markets with a vengance and are lending into acquisitions at levels we haven't seen since the late 1980s. The result is a whole lot of available capital chasing a limited number of good acquisition opportunities.

Very high earnings multiples. Acquisitions typically are valued as a "multiple" of the acquired company's operating cash flow (called EBITDA--for earnings before taxes, depreciation and amortization). In typical times, mature manufacturing companies historically have traded hands at multiples in the range of four to six times EBITDA. Today, we are seeing many deals completed at multiples of nine or 10 times EBITDA, or even higher. These are the highest multiples we've seen since--again--the LBO craze of the late 1980s.

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