How Will Deals Be Done in 2009?

Vendor loans, equity swaps, all-stock combinations, and sovereign wealth funds are going to be facilitating M&A in 2009 proposed a panel of experts at Acquisitions Monthly’s Webinar this morning.

“Vendor financing used to be the last resort to fill a gap but now we’re seeing deals where it is the only financing,” said Brian McKay, co-head of European M&A, Houlihan Lokey.

The increasing tendency of vendors to staple 2.5x or 3x of leverage to an asset in order to open up a sale to private equity firms was “a remarkable phenomenon” he said.

Vendor loans were only likely to be available where a vendor was behaving strategically to offload a non-core asset. Where there was a restructuring process underway, a vendor would just want rid he added.

John Sunderland, partner, PricewaterhouseCoopers argued that Sovereign Wealth Funds would play a much more active role in M&A deals compared to the more passive investment role they’ve played over the last few years.

“They’ve become rapidly more sophisticated in the last few months,” agreed Hernan Cristerna, co-head of M&A, JP Morgan.

Non-cash deals, or deals with a larger non-cash element will also be a feature of deals over the next year.

Sunderland pointed to the recently renegotiated Deutsche Bank acquisition of a stake in Postbank as a sign of things to come. Postbank’s vendor Deutsche Post will take an 8% stake in Deutsche Bank in return for Deutsche Bank acquiring 22.9% of Postbank.

Buyer optionality was another trend likely to be written into an increasing number of potential deals. Negotiating the option on a deal to pay a break fee and walk away before completion was something Alistair Asher, partner, Allen & Overy was seeing more and more, particularly in the US.

Deals in 2009 must overcome the optionality desired by the buyer and the certainty wanted by the seller. While a feature of any market, the current situation is unprecedented: “Never before have we seen as much tension between buyers and sellers as we are seeing now,” confirmed Cristerna.

Scarce capital will continue to impede plain-vanilla takeovers but the panel-members believed that deal flow driven by the current market conditions will in some cases be able to overcome the financing difficulties of today’s market.

Distressed deals will be the overriding theme of M&A in 2009 agreed the panel. Restructuring deals will lead to asset sales in a number of sectors, while some sectors, such as auto and airline will be see large all-stock combinations.

Defensive considerations, government-pressured and currency-influenced transactions will all take place.

Additionally, a lack of equilibrium between companies in the same sector will enable the well-capitalised champions of a sector to go bargain-hunting.