2005 is the year for increased M&A activity and firms going private

Expect continued merger and acquisition activity as well as more small, publicly traded companies going private in 2005, a panel of investment capital experts said January 13 at a Finance Roundtable meeting at Gleacher Center in Chicago .

Corporate confidence is on the rise, according to Mark Brady, principal and head of acquisitions at William Blair & Company. In 2004, 25 percent of publicly traded companies increased their dividends. Companies created jobs; the earnings outlook improved, he said. Companies looking to sell can expect a good price, though Brady cautioned that business owners shouldn't look to sell at the peak of their expected valuations because buyers want to get some future value improvement as well.

Owners need to continue to operate their business as if it will be ongoing in case the deal falls through, Brady added.

More of those deals are being done by non-bank, regulated investment companies, said Barry Freeman, director at Goldsmith Agio Helms.

Private equity firms continue to be aggressive buyers. There were 1,500 private equity firms who did more than 1,800 deals [combined] in 2004, he said. Private equity will continue to be a big player in 2005.

Luke Stifflear, principal, debt capital markets at William Blair, predicted another big player in terms of deal financing in 2005 would be the junior secured loan market, which grew from $3.3 billion in 2003 to more than $11 billion in the first 10 months of 2004.

The junior secured loan market is becoming a significant force, pushing the mezzanine debt investor out the door, Stifflear said. Mezzanine debt investors used to get returns of 18 to 23 percent. Now they're getting returns of 10 to 12 percent.

Private equity, by contrast, has seen increased returns recently, and a 35-year annualized return of 35.7 percent, said Craig Taylor, principal, Adams Street Partners.

There are large variations in those returns, Taylor added. If you stay with the top-tier managers, the returns will be quite a bit higher. If you invest in managers below the median, your returns will be quite miserable.

 

Phil Britt