M&A madness: a perfect storm of cheap capital and high valuations is driving South Florida's merger and acquisitions market with deal flows not seen in years

South Florida CEO, August, 2005 by Jennifer Leclaire

Dramatic dealmaking returned to South Florida last year and has not skipped a beat in 2005. The rebounded national economy has companies gearing up for expansion--and searching for strategic acquisitions with which to do so. And private equity funds see, for the first time in several years, the opportunity to turn a profit with acquisitions in a four- to five-year time frame.

In South Florida, this has led to major deals in the financial services sector (such as the $245 million purchase of Coral Gables-based Gibraltar Financial Corp. by Boston-based Boston Private Financial Holdings), the media industry and health care, among others. Experts predict the region's real estate and construction industry will see more M&A activity than any other industry during the next six months.

"Right now there are a lot of people looking to do a lot of deals," says Jorge L. Freeland, head of the domestic corporate and securities practice for global private equity law firm White & Case LLP in Miami. "Financing is cheap and sale prices are high, so [private equity funds] are selling everything in their portfolios. At the same time, most private equity funds in South Florida still have money to invest and are busy trying to put that money to work." The result: competition among private equity firms and corporate acquirers is driving prices up.

The entire state is experiencing a similar rush, as are other high-growth states on each coast. M&A deal flow nationwide totaled $766 billion in 2004, on 3,790 transactions, according to M&A market information provider Mergerstat LLC in Santa Monica, Calif. The volume through just the first six months of 2005 totaled $526 billion on 1,903 deals. If that pace continues through the second two quarters, total volume would nearly double that of the deal flow in 2003, which totaled $532 billion on 3,457 deals.

In fact, the volume is so great, those in the business say the demand for M&A experts is outrunning supply. There simply are not enough lawyers and financial experts trained in the essential nuts and bolts of assembling mega-merger deals--and the ones who are report one of their busiest years ever, says Tim Hartnett, a partner in PricewaterhouseCoopers International Limited's (PwC) transaction services group. PwC, in fact, recently launched a transaction services group in South Florida last year to get in on the action.

Driving South Florida's M&A Market

Motivated entrepreneurs, established family-owned businesses and strategic industrial interests make South Florida ripe for M&A activity, especially by corporations looking to fill in product offering gaps or expand into new territories. Corporations are flush with liquid assets in an economy that has not only rebounded since the dotcom bust, but is officially growing, says Miami-based attorney Steven Sonberg, M&A section leader for national law firm Holland & Knight LLP.

"Improved economic conditions have pumped up the stock market and given companies greater value. That's why we are seeing so many stock deals from corporate acquirers," Sonberg says.

In addition to that, he says, private equity firms are holding bundles of cash after successfully exiting their last round of deals four or five years ago. These firms are looking to reinvest in new acquisitions. The low cost of borrowing is also driving deals nationwide, and the weak US dollar has opened the market to foreign acquirers.

South Florida's real estate boom, too, is powering an influx of money into the area, says Jean-Pierre Trouillot, South Florida director of transaction services for New York-based KPMG International.

Local CEOs, optimistic about future economic growth, say they are motivated to acquire companies by expanded opportunities that demand strategic acquisitions to fill a market need.

For example, in the telecom space, GlobeTel Communications Corp., a Pembroke Pines-based telecommunications and financial services company, snapped up Naples-based HotZone Inc., a wireless applications company, in June, for an undisclosed amount in stock and cash. GlobeTel CEO Timothy Huff says the acquisition gives GlobeTel the missing wireless delivery piece of its applications platform.

In the bioscience arena, Miami-based SFBC International Inc., a provider of specialized drug development services to pharmaceutical and biotechnology companies, merged with Princeton, N.J.-based drug development company PharmaNet in a $248.6 million all-cash deal. SFBC CEO Arnold Hantman says the company hopes its expanded size and resources will attract clients that found SFBC too small in the past.

It is not just mid-sized companies that are acquisition targets. Corporations and private equity firms alike are targeting start-up companies, says KPMG's Trouillot. "We are seeing competition between private equity buyers and corporate strategic acquirers for companies," he says. "That is driving up prices, which makes the prospect of selling more attractive for the owner."

It is no wonder, then, that dealmakers nationwide see an excellent environment for M&A, according to the Association for Corporate Growth (ACG)/Thomson Financial's mid-year 2005 DealMaker's Survey. Nearly 85 percent called the M&A environment good or excellent, up from 72 percent at the end of 2004, and from just 45 percent at the end of 2003. And more than two-thirds of those polled expect the environment will improve further in the second half of 2005.