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How High Is Up?

Feb. 1, 2007
Acquisition pricing for middle-market deals those with a transaction price between $2 million to $250 million is currently at a record level. The last

Acquisition pricing for middle-market deals — those with a transaction price between $2 million to $250 million — is currently at a record level. The last time the middle market saw deal pricing anywhere near this was in the mid-1980s. The current pricing level isn't sustainable. When it ends, it is unlikely that we will see deal pricing like this again for at least 20 years. The table on this page shows four recent deals with which I am familiar. Here's what's behind this extreme but unsustainable level of acquisition pricing.

Excessive amount of capital available in the financial markets

This has been caused by a record level of debt and equity available from numerous sources, including hedge funds, institutions and financial companies.

Massive amounts of debt

The massive availability of debt, combined with other debt market factors, has produced very low interest rates for a sustained period. This low-cost financing has enabled private-equity firms to pay exorbitant prices for companies. The Federal Reserve's lax monetary policies earlier this decade and certain foreign financial market considerations helped create the environment that made this extremely high level of debt available.

Future economic conditions

Acquirers are consumed by excessive optimism about the economy's future and the likelihood of a “soft landing.” They expect the economy to have a very positive impact on intermediate-term earnings and future growth possibilities. I question the likelihood of a strong intermediate-term economy, and believe an economy in recession some time during that period is more likely.


Many institutions, pension funds and other sources of funds that once followed a more conservative investment policy have become envious of the current returns on investment being made by private-equity firms and hedge funds. These formerly conservative institutions are now much more aggressive in how they deploy their capital, which has produced new large pools of capital to fund acquisitions. When many of the high-priced, risky acquisitions now being made “turn sour,” this new source of money will likely dry up.

These factors and certain others to a lesser extent, have made private-equity firms the major pricing influence in middle-market deals. The pricing available from private-equity firms in many, if not the majority, of the deals that I handle is higher than the pricing available from strategic acquirers. I have never seen this before in my 28-year investment banking career. Since the mid-1980s, with rare exceptions, I have not found private-equity firms capable of paying prices competitive with those of an aggressive strategic acquirer. The multiples that private-equity firms are currently paying are driving up acquisition pricing and forcing strategic acquirers to match this level or forsake growth from external expansion.

The middle market has not seen deal pricing even comparable to recent pricing since the leveraged-buyout craze of the mid-1980s. We all know the sad ending of those deals for many acquirers and financiers — companies ended up in bankruptcy and the negative consequences on the overall economy contributed to the recession of the early-1990s. The result of the current craze may be similar, except its magnitude will probably be greater.

The current level of middle-market acquisition pricing is not sustainable. Whether this level of pricing will end in three months, six months, 18 months, or two years is open to debate. I think it will end within one year. When it ends, it will probably not be seen for another 20 years. When reality sets in, the consequences to the U.S. economy and to many acquirers will be very negative.

When the current deal pricing ends, it will probably produce a decline in pricing of approximately 50 percent from current levels. After the initial dramatic impact, middle-market deal pricing will probably eventually return to more traditional levels, which are 35 percent to 50 percent below the current pricing.

Prudent middle-market owners, executives or entrepreneurs who want to sell their companies in the next 10 years should proceed with the sale immediately. If they wait much longer, the window of opportunity will have closed. Consequently, even if their company grows at or slightly above expectations during normal economic conditions, their company will be worth considerably less than it is now. Correspondingly, if you believe in the wisdom of the old adage “sell high,” the time to proceed is now.

George Spilka is president of George Spilka and Associates, Allison Park, Pa. The firm specializes in mergers and acquisitions. The author's Web address is Reach him at (412) 486-8189 or by e-mail at [email protected].

RECENT PRICING FOR ACQUISITIONSEquipment manufacturer Acquirer EBITDA Multiple* Meat & seafood distributor Strategic 10 Plumbing distributor Private-equity group 11.8 Plastics company Strategic 11.2 Equipment manufacturer Private-equity group 10.7 *The EBITDA multiple represents the trailing 12 months' earnings before interest, taxes, depreciation and ammortization, as compared to the transaction price for the company. Prior to 2005, except in unique situations, this multiple for middle-market companies was rare.

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