It's A Deal

April 29, 2008

Women Are From Venus, M&A Is From Mars

If you’re in M&M, er, M&A, now you may know what it feels like to be a kid in a candy store.

One deal does not make a trend, of course, but Monday’s announcement that Mars and Berkshire Hathaway were teaming up to buy gum-maker Wrigley had to tickle the taste buds of a comatose buyout crowd desperate for signs of life.

Now, there’s usually very little connection between “$23 billion” or “Berkshire Hathaway” and “middle market,” but chew on this: If the big guys can snap out of their sour state, it just might be possible for the mid-market to walk away from the credit imbroglio entirely unscathed.

Don’t snicker. While it’s true that middle-market (and even more so, lower middle-market) deals have continued to get done throughout the credit downturn, a drought in activity among bigger players isn’t palatable. There are any number of reasons for that, other than that you don’t necessarily want to be competing with Goldman for your next deal.

As I talk with bankers, the less I hear about a tie-up in the credit markets and the more I hear about the growing impact of a slowing global economy. For the middle-market crowd, where financing was always less of an issue, this could be a particularly thorny issue. Only time will tell how gnarly this recession will be, but it’s safe to say that Warren Buffett’s Berkshire isn’t in the business of paying 28% premiums for consumer discretionary-type companies at the start of an extended economic pullback. (Buffett will own a bit more than 10% of Wrigley.)

There’s also the issue of valuation. The buy values Wrigley at about 20 times Ebitda, “extremely rich,” according to one analyst. Nothing wrong with a little froth to spice up a dreary market, even if some of Buffett’s detractors might be singing, “Sometimes you feel like a nut…” for the next few days.

And, there’s hope evident in how the deal was financed. Yes, there’s a good chance it wouldn’t have happened at all if not for Buffett and his $6 billion-plus contribution, but a shade more than $17 billion of the total price came from JPMorgan and Goldman, harkening back to the good old days of 2007, when getting financing was like taking candy from a baby.

Pretty sweet.