Transactional activity on rebound as economy, credit markets recover

By Mike Scott
Legal News

Some area business lawyers indicate that transactional activity such as mergers and acquisitions is slowly on the rise after many months of a virtually dry market.

There are several reasons for this, according to local lawyers. There has been pent-up demand for such deals since the credit markets crashed in the fall of 2008, said Daniel Minkus, a business lawyer and member with Clark Hill in Birmingham. He also sees an increase from foreign investors looking at investing equity in deals with American-based companies in the Michigan region.

“We’re seeing international players from all over the world — Western European, Pacific Rim, Asia, BRIC (Brazil, Russia, India and China) nations and more,” Minkus said. “I wouldn’t say it was any one particular region of the world over others.”

Another reason is that company valuations are typically below where they were one, two and possibly three years ago, although valuations remain high for many of the best-run companies, said Samuel Stahl, a business lawyer and partner with Honigman Miller Schwartz and Cohn in Detroit. Yet even for those companies it is possible that valuations would have been even higher if the economy and credit markets had not tanked in 2007-08.

“High quality companies can still attract high valuations but you can find some companies available at less expensive prices,” Stahl said. “Good quality companies are still in demand (for possible mergers and acquisitions).”

Some of the interest is for automotive and manufacturing companies, something which just a few months ago was nearly impossible to find, Minkus said. But the automotive market appears to be in the midst of an economic rebound caused both by significant cost cutting and increased sales, at least when compared to the last two years when vehicle sales significantly dropped.

On June 2, General Motors reported that its May sales rose 17 percent compared to April on strong new product sales and a big government fleet contract. Ford and Chrysler have also reported improved sales in recent months.

Automotive research firm Edmunds.com forecast that domestic consumers purchased new cars and trucks last month at a seasonally adjusted annual sales rate of 11.4 million vehicles. That would be considerably better than 9.9 million rate in May 2009, although still less than many previous years where domestic sales often were at or above 13 million vehicles per year.

“You are seeing more activity in the automotive market which is to say that it is more than zero with other deals likely to come,” Minkus said. “But the growth in M and A activity is really across multiple industries including technology and engineering as well.”

Credit is more available to businesses now than it was six or 12 months ago, but still nowhere near the availability entrepreneurs enjoyed for most of the last two decades. The uptick is being caused by an increase in the availability of money even though many business owners are being forced to bring more cash to most deals.

“The pendulum was way on one side for many years with credit being too readily available and then at the start of the Great Recession it swung the other way,” Minkus said. “Now it’s trying to find its appropriate level.”

To get mergers and acquisitions completed today, most financial investors who are involved have to partner with other firms to modify the risk portfolio, spreading both the risk and reward, Minkus said. And the use of non-traditional lenders continues to increase as a way to get the funding needed to complete a deal, since traditional lenders may not be willing to supply the full amount.

Companies are very cautious about moving forward with certain deals and lenders seem to be more willing to fund completions of transactions than to fund company operations, Stahl said. This is true in the automotive and many other sectors. He agrees that companies understand the need to contribute more equity for “quality acquisition” targets, a strategy that is being shared by private equity funds and companies.

“There has been money on the sidelines with private equity firms for some time,” Stahl said. “When there is an opportunity to make a deal that two or more parties feel is beneficial, there is often access to money.”

There is also more seller financing available to help make it easier for deals to be completed. This forced some parties to agree to take consideration over money.

“There is activity percolating and as (credit) continues to become more available I think we will see more mergers and acquisitions,” Minkus said. “Like the economy in general recovery is happening at a slow and steady rate.”

What hasn’t recovered is the market for “megadeals,” according to Stahl. Companies that earn between $50 to $500 million are not only pursuers, but potential transactional targets in this economic environment, Stahl said. But mergers and acquisitions involving larger companies are few and far between, making the market more competitive for existing law firms to fight over available transactional clients who are willing and able to make deals now.

“There is a more lively pursuit (by law firms) of this lower to middle market space because those megadeals are gone,” Stahl said. “We’re lean and efficient so we believe we are in a good position to service these clients but some of the larger institutional law firms are going after this business which is a new market for them.”

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