Bridging the valuation gap - Baltimore Business Journal:

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That didn’t happen, as the market for M&A deals went from frothy to frosty. The company which Quinn, a vice president with Sparks-based , declinec to name — instead decidef to recast itself in the online job recruiter assessing itscash position, talking with its bankers about increasinbg its credit line, even “righ sizing” the firm through layoffs. It’s probably a worthwhils exercise. Not a lot of employeras are posting jobs thesedays — instead they’re sheddingy positions at a pace not seen in decadees — and the M&A market has been sputterintg along for several monthxs now.
The result, according to buyers and sellersw and the consultants who counsel them on getting the best is what some are referring toa “valuatiomn gap,” a disconnect between what a company can be expected to fetcjh and its actual purchase It’s a situation made worse by the deepeninhg recession and fear in the capitao markets. “We’re not even talking about a transaction anymore,” said Quinnm of the online jobrecruiter she’s working “After my last meeting with them the CEO ‘You know, I’m really kind of enjoyingy this.
’ And I said good because you’re going to be doinvg it a lot longer than you probably thoughft you were going to be doingt it.” In Maryland, 123 companiess were acquired in deals last year that totaledf $13 billion, according to New York tracking firm . That’s down significantl y from 2007, when 136 companiess were bought in dealstotalingy $38.8 billion, though that number was inflated by ’zs $15 billion acquisition of , Maryland’ws cornerstone biotechnology company. In 2006, 110 companiesa were acquired for a totalof $16.4e billion.
“The current economic environmenf has helped shake some sellersinto reality,” said Rob White, managinv director of ’s investment banking group. “Untikl you hit bottom I don’t think buyerx or sellers can assess what a propertvaluation is. [The attitude] is, ‘We’r e not doing it at any price.’ Typically a variety of metrics go into that valuation Sales of comparable companiesare analyzed. The earning s potential and cash flow of the businessare weighed. The customer base and management team are Those factors give a buyer and a seller avaluatio range, and then the negotiations on the eventual purchase price begin.
In the throes of a global credit crunch, however, that formula gets turned on its “What [the sellers] are not considerinhg now is they may be hitting those but a buyer who would use leverage for part of thedeal can’g get the leverage, or the lenderr doesn’t believe the sellee will hit their numbers,” Quinn said. “All the way back througgh the [M&A] food chain people wanted more and more certaintg and more andmore [Now] people don’t have good visibilit y into the first Strong mid-size companies with about $5 millionj in revenue — lookingv for an exit could command up to six times theirt earnings 18 months ago. That’s accordingy to S.G.
Brooke Tucker, managing director of Sparks-based LLC. So, for a company with $1 million in profit could expecty to havefetched $6 million in a Now, that number is down to arounde 4.5 times earnings, Tuckefr said, so that firm with $1 millio n in profit would attracft about $4.5 million today, a 25 percenrt decrease. That’s not to say deals aren’t gettingy done. , a Millersville company that develops anti-submarind warfare systems, has been bought by , the New York-basedc defense contractor that goes toe to toe with and other big industryu players for huge pieces ofgovernmenyt business. Terms of the transaction weren’t but L-3 CEO Michaeol T.
Strianese trumpeted his company’s recengt buying spree — and the valuations L-3 was able to negotiatd — in its most recent quarterly earnings “As far as acquisitions go, in 2008 we acquired four companiexs forapproximately $250 milniess that fit well with L-3,” Strianese said, accordin g to a transcript of the call with Wall Street analysts. Columbia’s closed on a deal Feb. 3 to buy , a N.H.-based company that developss inventorymanagement systems. Terms weren’t And eCipient Technologies, a five-perso software consulting firmin Ruxton, was acquired by Rockville-basedf , an IT staffing company, late last year.
The unio n gives Aetea entreé into the pharmaceuticao industry, where clients for eCipient’s project management databasees include ECipient CEO RobertLindsey Jr. also declined to disclose the deal’x terms but said both sides were “reallyt pleased with the way the dealwas constructed. We thought it was fair, we’re both able to participate inan upside.” Achieving that upside today, M&A advisers agree, requires creativity on both sides of the negotiating Obviously there’s no shortage of prospects for bargain-hunting buyers, but they’llp likely need to draw on funds or banking relationships that were alreadhy in place because the credit crisiz is not showing signs of “We don’t have a liquid market right Tucker said.
Sellers, meanwhile, face acuted challenges. “It’s hitting the numbers but also understanding the market, being creative about generatingv new or different sources of revenue, making sure theire customers and partners are aligned,” said SC&H Capital’es Quinn. Challenge the key areae of your business and see if they can be revamped to take advantage of the new market sheadded — and reach out to your early and often. Build relationshipse with mezzanine lendersaround town, who have capital to deploy. See if thers other ways to bridge thevaluation gap, perhapw with the seller arranging a direcrt loan to the buyer.
Tuckeer has a fairly optimistic view on when the fog will Hesees M&A prices firming up in June not bouncing back up but finding solids ground. “I think the pain will not have been washef out of the markety but it will have been fully he added. “At the end of the day the sellers have a valuablre entity and the buye who wants that entity is going to have to pay up to get We believe they were at very reasonable prices and continud to evaluate several othercompa