Managing M&A Expectations (Updated)

Now updated with ACG/Thomson press release and underlying data

Last month, I asked PE Week Wire readers (become one here) to participate in the Bi-Annual ACG/Thomson DealMakers Survey. The official results come out tomorrow, but since everyone was so generous with their time, we got a sneak peak:

Ninety-three percent of respondents (1,230 in all) believe that the current M&A environment is good or excellent. Moreover, 49% expect significant or moderate M&A activity growth over the next sixth months, with another 41% expecting stability. Count ACG chief Dan Varroney in with the 49%, with a personal prediction that “2007 will be another record year, with us breaking the threshold of $4 trillion in announced global transactions.” He adds that the increase over 2006 will be led by Western Europe, due to factors like anticipated GDP growth in the Euro zone, a surplus of available capital and recent German tax changes that make it more advantageous for families to sell their businesses.

To me, however, the most interesting survey result is the following: When asked if it currently is a Buyers or Sellers market, 75% of respondents sided with the Sellers. This is compared to just 10% with the Buyers, and another 15% that weren’t sure. I don’t say this is interesting because it’s necessarily surprising – particularly given the endless rise in purchase price multiples – but rather because it shows a tremendous lack of discipline among private equity investors. If LBO firms are at a current disadvantage, why increase the amount of deal activity? The only logical explanation – and logical does not equal justifiable – is momentum spurred on by limited partner largesse.

Or, perhaps, it’s just a case of acute denial (“Yeah the overall market is bad, but I’ll be fine because I’m smarter than the overall market.”). After all, 62% of respondents believe that the average EBITDA multiples over the next six months will be in excess of 7x, including 22% who expect them to be in excess of 9x. But 58% respondents nonetheless insist that the lowest IRR they’ll accept is 21 percent. Talk about a win-win…

Read the press release: Global – FINAL.doc

Read the full survey results: All survey questions – FINAL.doc