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Baird: Less M&A, More Restructurings
'Debt restructurings are likely to become much more commonplace,' according to Milwaukee middle-market firm.
August 27, 2008
Global and US M&A deal flow continued to decline in July, and more debt restructurings are likely going forward, according to Robert W. Baird & Co.'s latest Merger Monthly report.
Milwaukee-based Baird recorded 2,450 global transactions during July 2008, 22.6% less than July 2007, while global M&A dollar volume came to $356.3 billion, a 19.8% decline from the year-prior period. The trailing 12-month averages for deal flow are 2,625 transactions and $217.7 billion. According to Baird, July was the second consecutive month where the monthly deal dollar amount was greater than the trailing 12-month dollar volume.
In 2008 year-to-date (until the end of July), 17,353 deals were announced globally, a 16.2% drop over the same period in 2007. The dollar amount, $1.4 trillion, is 41.9% lower than the year-prior time frame.
In the US, there were 878 publicized deals during July, a 13.8% decrease from last year. The dollar amount, $163.3 billion, was 23.6% lower than the same month last year. For year-to-date 2008, there were 5,868 deals worth $706.8 billion announced in the US, declines of 18.8% and 39.1% from the year-prior period, respectively.
Although the number of multi-billion dollar transactions this year has been less than in 2007 and 2006, private equity firms have taken 12% of all primary institutional allocations from traditional syndications and cash sales, according to Standard & Poor's Leveraged Commentary & Data, up from 10% in 2007 and 7.7% in 2006.
As for US middle-market activity, Baird recorded 281 announced deals worth $29.8 billion in July, declines of 26.4% and 29.1% over the year-prior period, respectively. Meanwhile, year-to-date in 2008, there were 1,853 announced US mid-market deals, a 26.3% decrease from the year-earlier time frame.
The amount of undisclosed transactions in year-to-date 2008, though, is only 12.8% lower than the same period in 2007. Many of those deals could be from the middle market, states Baird.
The firm cites data from Factset Mergerstat which found that just three out of 49 tracked industries saw an increase in year-to-date 2008 deal flow over last year--miscellaneous manufacturing (more than two extra deals), machinery (more than one extra deal) and construction mining and oil equipment (more than one extra deal). Miscellaneous services and leisure and entertainment saw the highest declines in deal activity (there were 150 and 228 fewer transactions, respectively, in those industries from the year-prior period).
Baird also recorded a 3.5% rise in its credit default swap (CDS) index during July. The index reached a record high of 273.9 on July 31, up from 264.6 on June 30 and 265.5 on Feb. 29. The July 31 closing is up 31% from the May 31 level, when, as Baird states, "Many observers surmised, incorrectly in hindsight, that the worst of the credit crisis had passed."
Baird continues, "Bankruptcy filings by large companies across many industries have become widespread, banks have reduced acceptable levels of leverage and have widened borrowing spreads, and alternative capital providers have raised hurdle rates charged on primary investments as liquid junk bonds issued by large companies such as Clear Channel, Ford and GM and similar instruments trading in the secondary market yield mezzanine-like returns. In this environment, with the prospects of refinancing an over-leveraged balance sheet becoming increasingly remote, debt restructurings are likely to become much more commonplace."
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