M&A is booming, but PE is getting squeezed out by strategics

Strategics, armed with a massive war chest, have a cash advantage in deals, said Eric Roth, a Lazard managing director and head of the firm’s Consumer Retail Group. U.S. non-financial companies were sitting on $1.73 trillion of cash as of year-end 2014, Moody’s Investors Service said.

“It’s a seller’s market in consumer,” Roth said.

The U.S. M&A market is on track to produce its best full-year since Thomson Reuters began recording data back in 1980, said Matt Toole, director of Deals Intelligence for the company. So far this year, U.S. strategic transactions account for nearly 96 percent of the overall M&A market. U.S. private equity-backed LBOs, meanwhile, comprised 4.1 percent, Thomson Reuters said.

There have been 7,601 U.S. strategic mergers as of October 27 valued at $1.6 trillion. This compares to 547 U.S. PE M&A deals this year, totaling $70.4 billion, Thomson Reuters said.

“Everyone is buying everything,” one banker said. “You see plenty of strategics in processes now. The M&A market is strong.”

With their huge cash holdings, strategics are even competing with buyout shops down-market. Strategics in the beauty sector have shifted down in terms of M&A and are targeting deals as small as $50 million, Roth said.

Jeff Kuhr, a managing director at Sawaya Segalas & Co LLC, said most deals in consumer are in the middle market. Corporates have bid on deals between $25 million to $100 million, he said. “Multibillion-dollar deals aren’t coming around all that often,” Kuhr said.

Both Roth and Kuhr appeared October 13 on the Mergermarket Consumer M&A Forum panel called “Consumer M&A: A changing tide?”

Buyout shops are always competing with strategics, said Robert Profusek, a partner with law firm Jones Day. Deals “may be harder now, but private equity isn’t out,” he said at the event. “Private equity is by no means on its back.”

Like corporates, PE firms are also still sitting on a large cash pile. Private equity dry powder stands at $1.34 trillion, according to Preqin. The prices in the M&A market have made private equity firms “very picky,” a lender said. GPs are trying to come up with justifications for paying high prices, the lender said. Some PE firms are doing small add-on deals that boost the EBITDA of a platform company. “For those who do the work, it can be a successful way to grow the [platform] business,” the lender said.

PE firms also are under pressure to spend their funds or risk losing the money when the investment period runs out, the lending source said. Firms can go back to their LPs and ask for fund extensions. But, the source said, “It’s a little embarrassing to go back to the LPs and say, ‘We missed the market and didn’t invest when we should have. And now we need to ask for more time.’”

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