Survey says: Mergers and acquisitions planned despite credit crunch

Strategic buyers appear to be more bullish on the outlook for the mergers and acquisitions market than their private equity counterparts, according to a survey released this week by the law firm of Nixon Peabody LLP.

The three-month long survey, conducted in the fourth quarter of 2007 and the first quarter of 2008, examined merger and acquisition activity during the ongoing credit crunch.

Strategic transactions are important to Rochester companies, said Lori Green, a partner in Nixon Peabody's private company and public company transactions practice groups.

"One of the key findings is that deals will continue, notwithstanding the credit crunch," Green said.

Several local corporations ,including Bausch & Lomb, Kodak, Xerox Corp. and Constellation Brands, regularly engage in transactions.

The law firm's survey of senior Fortune 500 executives and private equity practitioners appeared to confirm the tightening credit market significantly reduced the number of transactions in the second half of 2007. Deals worth a total of $479.2 billion were completed during that period, compared to deals totaling $846.8 billion in the first two quarters of 2007.

Green suggested companies are waiting to see what would happen, and how long the crunch will last.

Despite the drop in deals last year, more than half of executives surveyed plan to engage in M&A activity in the next 12 months.

Strategic buyers are more optimistic than private equity buyers: 51 percent of strategic respondents said worsening market conditions will serve as a catalyst for an increase in M&A deals.

Mid-market deals less than $500 million are expected to dominate M&A activity in the next year, with technology and financial services likely to be the most active sectors for deal making, according to the survey.

Reflecting the apparent pullback by private equity, 78 percent of executives predicted the number of strategic deals will surpass private equity deals as a result of the tightening credit markets.

More than three quarters of executives also expected private equity bid premiums to fall between 10to 25 percent, while half expected the premiums on bids by strategic buyers to fall by that amount. Falling equity bid premiums open the door for strategic buyers to win bids, Green said.

Another survey topic relevant to the Rochester community is the predicted increase in cross-border transactions involving foreign investors interested in purchasing U.S. companies, Green said.

"There is no reason to think the Rochester community would be insulated from that" trend, which is aided by lower dollar valuations, Green noted.

Trends in material adverse change clauses (MACs) were examined as a follow-up to Nixon Peabody's sixth annual MAC survey, released last fall.

Survey results suggest corporate executives and private equity practitioners are responding differently to the credit crunch. More than 90 percent of private equity practitioners inserted additional MAC clauses due to the turmoil in the credit markets, while only 35 percent of corporate executives added clauses for this reason.

"The survey clearly indicates a more challenging and uncertain M&A environment, with deal sizes expected to drop and disagreement over whether more attractive valuations can offset the effect of tighter credit in terms of deal volume," said Philip B. Taub, chairman of Nixon Peabody's private company transactions practice.

Dominick DeChiara, chairman of the firm's private equity practice, said "the credit crunch appears to have shifted the playing field, at least temporarily, toward strategic buyers.

DeChiara also noted that private equity buyers "are expecting smaller and perhaps fewer deals and seeking more assurances."

The survey was completed in the first quarter of 2008 by mergermarket and polled more than 100 Fortune 500 executives and private equity practitioners.

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