Points To Bull Market In M&A For The Medium Term
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With The Blackstone Group’s (NYSE: BX) recent $4.75 billion IPO, and with U.K. regulatory bodies grilling PE bigwigs about asset stripping, tax evasion and job slashing, private equity has figured prominently in news reports and editorials during the past month. To readers of this column, the growing clout of private equity in the health care M&A market will come as no surprise, as a reservoir of pent-up capital seeks investment. We recently attended Harris Williams & Co.’s Second Annual M&A Outlook Roundtable in New York City to hear what they had to say about the opportunities that private equity is currently finding in the middle market (deals from $50.0 million to $500.0 million), a scenario they summed up in the phrase, “a perfect storm.”
Their figures present a picture of robust middle market M&A: for example, from 2005 to 2006, activity increased by 15%. This perfect storm, as they characterize it, has several drivers: economic growth and strong corporate earnings; liquid and active debt markets; significant private equity and hedge fund capital raised; increased aggressiveness of strategic buyers; strong target company performance; and increased crossborder activity. Low interest rates, for example, have encouraged bankers and advisers to bring willing buyers and sellers together for some mutually beneficial dealmaking. Chris Williams, one of the founders of HW&Co., observed that there is currently “$180.0 billion in private equity that has to be spent,” and that “private equity is an excellent asset class for return on equity.” Low default rates, he added, have translated into bankers’ increased willingness to lend. Besides health care, HW&Co. looked at the building industry; transportation and logistics; and technology.
Turner Bredrup discussed Harris Williams’ involvement in three areas of health care: ancillary services and outsourcing; medical and life science products; and facilities and alternate site care. These three areas line up on a scale from health care “light” (or perhaps “lite”) to health care “heavy.” Health care light , such as outsourcing, is one step removed from the patient, is not in the direct line of fire of reimbursement and has less regulatory oversight. As a result, it can take retail models more easily than can health care heavy areas, such as alternate site care. Health care light consequently attracts a greater range of buyers, financial and strategic, while health care heavy is restricted to a smaller universe of buyers, generally strategic with some PEGs. Companies in all three areas benefit from a positive demographic outlook, enjoy a superior cost position, generate positive cash flow, have a low degree of technological risk and operate in fragmented markets with substantial M&A activity, allowing investors scope to make investments and to cash in on them. In an indication of how this market is buoying valuations, earlier this year HW&Co. negotiated the sale of Masterplan, a health care light company, to Berkshire Partners for 15x EBITDA.
Asked to gaze into the future, members of the panel opined that an optimistic scenario of the M&A market would see the current bull market last another four to five years. Further, because of all the capital available, the correction, when it comes, will likely be a short one, lasting no more than 18 months. It will involve a shake-out of weaker companies and undisciplined bankers (witness the subprime mortgage market), which in Darwinian and competitive terms need not be such a bad thing.
Harris Williams & Co., a member of The PNC Financial Services Group (NYSE: PNC), is an M&A advisory firm focused exclusively on the middle market (www.harriswilliams.com).
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