More Buyers, More Sellers As Mergers Rebound

The M&A market has gone from empty to crowded, with cash-heavy strategics and overhung private equity firms on the prowl for new deals.

“It’s crazy busy,” says Orlando Bravo, managing partner of Thoma Bravo. “It’s August and the whole financial industry [usually] slows down right before Labor Day, but we’re seeing a lot of activity in investments and portfolio companies.”

Thoma Bravo, which invests in mid-market technology and services companies, has been particularly busy. The firm closed its $242 million buy of Double-Take Software in July. Last month, it completed a $717 million acquisition of SonicWall, a provider of IT security and data backup and recovery solutions.

The downturn provided an opportunity for good deals. Thoma Bravo has completed nine acquisitions, including add-ons, since 2008. It also sold Datatel for $570 million to Hellman & Friedman in 2009, as well as its convertible preferred position in JDA software.

Bravo, who himself focuses on software, says firms with a “clean growth business” were selling for 7.5x EBITDA during the downturn. This has since jumped to 9 to 10x EBITDA, he says. Unfortunately, there were few “clean” companies available in 2008. For examples, a $200 million company, with 35% margins that was growing 15% year-over-year, wasn’t up for sale in 2008. But a $200 million firm with 10% margins — that was solid but had trouble growing its business– could be found, he says. In 2008, those “problematic” companies could be bought for about 60% of current prices.

“But to do those deals you need to have an operating team with a strategy for that business,” he says. “If not, it’s not going to make sense.”

With better multiples, come more participants. Many companies held off selling during all of 2008 and much of 2009. Valuations were low and financing was scarce or unavailable. “Anyone who wanted to sell during the last two-and-a half years didn’t and they’re in the market right now,” he says.

PE firms, largely inactive during the downturn, are looking to put their money to work. “The overhang is a big, big issue,” says Bravo, who claims his firm doesn’t have the problem. Thoma Bravo has invested roughly $500 million since 2008, including the buys of Acresso Software for $200 million in 2008 and Manatron for $66 million. Both deals came from the firm’s last fund, Toma Bravo IX, which raised $822.5 million in early 2008. About half is invested, Bravo says. He expects the PE shop will begin fundraising for its next fund at the end of 2011.

Strategics are also dealing with their own overhang, which is prompting them to seek out buys. During the downturn, strategic buyers were not active as they saw their stock prices tumbling and their boards wanted to reserve cash. That has since changed. Strategics that were out of the market from 2008 to 2009 now have a healthy balance sheet that is flush with cash. They also must return funds to investors via dividends or redeploy it. “They want to do deals,” Bravo says.