M and A
Mergers And Acquisitions: A Market Window
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There has been quite a flurry of M&A activity lately, sometimes including the private banking sector itself. The author of this article says there is a "market window" that is favourable for deals due to attractive valuations.
Market resilience and current valuations contrast with the
collapse of 2008. This trend is explained by a number of
supporting factors, including the significant presence of
investment funds. As shown by deals as recent as this week’s
Avaloq/NEC and Intesa Sanpaolo/REYL deals (see here
and here),
M&A is busy in the wealth management sector. And wealth
managers themselves need to understand the dynamics of M&A
across the corporate world as a whole.
This article is by Arnaud Petit, managing director at Edmond de
Rothschild Corporate Finance, part of Edmond de
Rothschild. The editors are pleased to share these views.
Jump into the conversation if you want to respond. Email the
editors at tom.burroughes@wealthbriefing.com
or jackie.bennion@clearviewpublishing.com
As Warren Buffet likes to say: “You never know who’s swimming
naked until the tide goes out.” Exogenous shocks generated by
crises throw a harsh light on the real state of the market, and
excessive risks taken by investors are plain to see. The subprime
and sovereign debt crises were good illustrations of this
phenomenon. But while the financial shock of 2008 had an
immediate impact on mergers and acquisitions and resulted in
valuations plummeting, what can we say about the effects of the
coronavirus crisis?
Firstly, we should note that there was a boom period for M&A
prior to lockdown, in terms of both volumes and average
valuations. The Argos Index tracking valuation multiples for
private deals broke through the threshold of 10x EBITDA at the
end of 2019, versus a multiple of 8x five years earlier. Although
the market was significantly affected by the months of general
lockdown, subsequent months have been rather encouraging, unlike
the situation experienced in 2008. How can we explain that?
Vigorous growth of investment funds
The mergers and acquisitions market today is driven by investment
funds, which account for over half of the deals done. In France,
for example, they raised €21 billion in 2019, versus €17 billion
in 2017. These funds value businesses better than industrial
companies do, the counterpart of which is lower expected returns.
Over 10 years, target private equity returns have thus fallen
from around 25 per cent to a range of between 17 per cent and 20
per cent.
A robust debt market
In addition, and in contrast to 2008, commercial banks have
healthy balance sheets. After a period tied up with granting
government-backed loans, credit institutions have returned to
their more normal business. The disintermediation of debt must
also be emphasised as a factor that provides support for mergers
and acquisition activity. Debt funds are becoming a real
alternative to bank loans. They raise money from institutional
investors to lend to companies and investment funds. These funds
doubled the amount of money raised to €4 billion between 2017 and
2019.
Flight to quality
It is also worth noting that the trend among investors is to look
for lower risk investments, as happens in every financial crisis.
This flight to quality is leading to a scarcity effect and is
pushing up valuations. In the first half of 2020, more than 15
per cent of deals were done at multiples in excess of 15 per cent
EBITDA.
Whereas healthcare, energy, education and technology are showing
sharp rises in value, the retail, aerospace, transport and
hospitality sectors are suffering, which, at the same time,
creates opportunities for consolidation.
The virtues of consolidation
The vulnerability of some companies is pushing them into joining
forces with stronger companies, and even into accelerating their
external growth with the support of financial partners. These
platforms for consolidation are particularly popular in
industries that are still very fragmented. Investment funds are
seeking to reproduce the example of the healthcare services
sector where there have been numerous link-ups between medical
analysis laboratories, private clinics and retirement homes in
recent years.
Ex-coronavirus EBITDA
Finally, the mergers and acquisitions market has become more
professional and sophisticated as a result of the growth in the
number of deals brokered by financial advisors. This
intermediation has led to best practices becoming widespread,
which is beneficial to deal transparency and the quality of
information. For example, communicating an adjusted EBITDA figure
corrects the accounting multiple for any elements assessed as
being non-recurring. The use of EBITDA©, as an adjusted,
standardised, annualised, pro forma EBITDA allows calculations to
be based on a year that excludes the impact of coronavirus,
because of its exceptional nature. Now largely accepted by the
financial community, this practice brings the position of buyers
and sellers closer together.
The market window is therefore favourable, with attractive
valuations for resilient and defensive assets responding to
investors’ current criteria. While prudence is still called for
in 2021, which is already looking like a pivotal year, historic
government stimulus packages and central bank action also give us
grounds to remain optimistic.