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Expect another strong mergers and acquisition market in 2005, Barry D. Freeman ’71, managing director for the Chicago office of Goldsmith-Agio-Helms, told the Mergers & Acquisitions Club at Gleacher Center on April 2.
There was record M&A activity in 2004, with total volume up 53 percent from 2003, which Freeman attributed to low interest rates, availability of credit, and strong pricing for sellers.
Financing options for these deals have evolved from a strong reliance on mezzanine financing to junior secured loans, which are less expensive for borrowers. As a result of the increased reliance on junior secured debt and an increasing number of investment banking companies, the rates for mezzanine financing have dropped from 1823 percent to 1520 percent over the last five years, Freeman said.
Freeman warned students interested in pursuing an M&A career that new investment banks tend to have short life spans, so they would be better concentrating any job search with more established firms.
He expects the M&A rate to continue to be strong this year because many of the same economic conditions continue to exist. Interest rates have moved up, but are still attractive from a historical perspective. Freeman also cited a Bank of America CFO survey that reported 23 percent of respondents expect to participate in a deal this year. The survey also reported the highest CFO optimism for the economy in seven years, another indicator of continued strong M&A activity.
Some of the buy-side drivers include strong earnings for U.S. firms and the weak dollar for foreign investors, Freeman said, adding that U.S. firms in mature industries need to make acquisitions in order to exceed industry growth and earnings averages.
However, he expects U.S. companies to stay within their own industries when making acquisitions, rather than buying fast growing companies in other sectors.
Phil Britt