'A tale of two markets'.

• Author: Esbeck, Mark
• Position: Global M&A - Report

"It was the best of times, it was the worst of times ... it was the season of Light, it was the season of Darkness, it was the spring of Hope ..."

This opening to the Charles Dickens' 1859 classic A Tale of Two Cities could also describe the mergers and acquisitions market from Jan. 1, 2008, up to the second quarter 2009. Better yet, this time period could aptly be described as A Tale of Two Markets.

In this updated version, Sept. 15, 2008, is likely to represent the line of demarcation for the change from the season of "Light" to one of "Darkness," with respect to the M&A market. It was the date that the 2008-09 global financial and liquidity crisis firmly set hold. On this day, a shock rippled throughout the global financial community as United States investment-banking firm Lehman Brothers Holdings Inc. filed for chapter 11 bankruptcy protection.

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Fear and mistrust gripped capital markets. Liquidity vanished almost overnight as lines of credit were cancelled, cash calls went unanswered and new extensions of credit were postponed or refused. M&A markets took a sudden and swift turn for the worse.

Prior to that, mergers and acquisitions--and advisers to M&A--were enjoying a record year. By December, however, the 15th annual IMAP survey found advisers reporting noticeably fewer buyers in the market. Sellers, especially in the U.S. and Canada, were also in full retreat.

As the financial crisis deepened in the fourth quarter, the M&A market was disrupted by funding uncertainties and an expanding gap between buyer and seller valuation expectations. The adverse conditions, first felt in North America, spread throughout Europe, the rest of the world and then to Latin America.

The Season of Light

The first nine months of 2008 were a booming time for M&A. "During the first three quarters, equity was abundant and lender financing was widely available at reasonable rates of interest. This was true throughout the world," says Germany-based Karl Fesenmeyer, chairman of the board of IMAP Inc. and a senior M&A transaction adviser.

Transaction closings for IMAP's adviser members also demonstrated this fact. Just a little more than 10 percent of the total M&A closings in 2008 were completed in the fourth quarter--normally a strong period of closing activity with year-end budgetary and goal pressures helping to drive transaction completion.

Transaction multiples for closed M&A deals were also reflective of changed market conditions...