Wipeout!
Dudes, dealmaking been riding one radical wave over the past few months.
Now it’s coming to a crashing end and the question is: are we going to ride another roller, make it safely to shore or end up sinking beneath the surface?
All Midlands pundits agree that the last few months have been exceptional in the tides of dealmaking, largely because the Chancellor’s changes to Capital Gains Tax (CGT) have created an artificial market.
From 5 April 2008 CGT, in most cases, rose from 10 to 18 per cent – a hefty hike to any shareholder selling a business. Unsurprisingly many owner managers looking to sell were rather keen to get the deal done before the deadline.
Gavin White, partner at law firm Flint Bishop, says: “There is little doubt that some deals have accelerated because of CGT. We wouldn’t be at this ridiculous level of businesses without this.”
Roger Buckley, corporate finance partner of BDO Stoy Hayward, agrees: “Generally, we have seen an acceleration of deals – it’s been a mini-boom time. Like everyone else we have been phenomenally busy over the first quarter of the year. We have been giving our staff lots of ‘developmental opportunities’, or rather we have been pushing the team to the limit.”
And Ian Tetsill, director at Barclays Leveraged Finance, agrees. He says: “Volumes have picked up partly because of the changes to CGT, but it is an artificial boom. Certainly the lawyers have been doing well over the past few months – you have not been able to get banking lawyers for love nor money.”
But, while dealmakers have been happy to ride the big wave while it has lasted, few believe that the momentum will be maintained into the second quarter of the year. Many of the deals that would have taken place between April, May and June 2008 have been dragged forward by the undercurrents created by CGT into the first quarter.
And it has meant that many dealmakers have been so busy getting work away over the first quarter of 2008 that left little time has been left to search for fresh deals.
Graham Mold, investment director with Catapult Venture Managers, adds: “The overall picture for the corporate finance community at large does not look too promising for 2008.
“It seems logical that those advisers working full steam ahead on several deals in the first quarter are unlikely to have had the level of resources to be working on many other transactions. The upshot of this is that they are likely to experience a drop in deals done within the second quarter.”
Other pundits will admit tha,t because of the artificial deadline created by the changes in CGT, many would-be vendors, who have missed the 5 April cut-off, have simply concluded that now is perhaps not the best time to go for a deal anyway. If they have had to sit it out this time they may as well sit out for another year or so until prices for businesses start rising again.
But it has not all been plain surfing for Midlands dealmakers over the past few months, due to the credit crunch, which is still making seriously big waves in the region.
The region, specialising in deals at the smaller and mid-range, has not been hit anything like as badly as has London, where the mega-deal once reigned supreme. However, even those dealmakers who a few months ago were claiming that the credit crunch had somehow magically passed over the Midlands will now admit that it is having an effect here too.
Get them in a quiet bar or boardroom and many will admit to would-be deals, usually on a “you didn’t get this from me” basis, that have been holed and sunk because of the very defensive positions now being taken by the banks.
The consensus is that banks’ credit committees have been rejecting all but the most copper-bottomed of deals and are unwilling to countenance few transactions worth more than, say, £20m.
In addition the banks, still very wary of each other because of the credit crunch, are not prepared to take on and then syndicate loans for deals – they simply do not trust each other.
The best many would-be dealmakers can hope for, currently, is for a group of rival bankers to get collectively excited about a transaction and for them put together a clubbed funding package, sharing the power, the glory and the risk.
Martin Rogers, managing partner at Mazars in Nottingham, says: “Despite what’s claimed by many the credit crunch has affected deals, including those that we are trying to get away.
“For example, we agreed a price on a management buy-in in December with a bank, which seemed very happy with the deal. In January the price was too high for the bank. That was just a few weeks later; now the deal has fallen over and simply won’t go ahead for at least a year.
“It is all about confidence. The credit committees are very, very risk averse. It is creating a massive period of uncertainty. The lack of liquidity is affecting what we do.”
Tetsill says: “Deals are still being done because banks are clubbing and being collaborative to ensure they get them away. However, we as banks are underwriting less and clubbing more.” Phil Burns, of Clearwater Corporate Finance, adds: “Funders are more cautious than a year or so ago, but gaps in provision are being filled by others, rather than stopping deals happening altogether. Dealmaking is a bit harder so advisers are having to work harder for their money.”
Of course all this talk of CGT and credit crunch are undercurrents in a larger economic tide, which at the moment seems to be going out at some speed. The economy isn’t doing particularly well and so prices for businesses are falling. The upside is that some of the silly multiples that were being witnessed less than 12 months have been swept away and replaced by more sober assessments of companies’ true worths.
However, predictably, potential vendors’ expectations lag behind the reality, so the concern is that over the next few months many owner managers will take a “thanks, but no thanks” to dealmakers’ inducements to sell when they see the prices offered.
Burns says: “If there were deals that did not make it to the tax deadline, and they were only working hard because of the tax window, those people will not now be in a hurry and will probably be looking 12 months hence.”
But dealmakers are, by their very nature, a fairly upbeat lot, and are already seeing the opportunities that the difficult economic crosscurrents may bring.
Many are already switching their attention from owner managers to larger corporates that, in uncertain and cash-strapped times, may be looking to dispose of a few less than core assets. Management teams and trade buyers, seeing the reduced values, may well be tempted back to the water, dive in and buy.
And, although few will say it with any glee, difficult times mean more distressed sales, more knock-down prices, and more corporate failures for those business willing and with resources to snap up a sinking rival.
Buckley says: “I am expecting a number of corporate acquisitions. The corporates are in as much of a buying mood as they are for disposals, particularly those with good reserves, so we are seeing the return of the trade buyers as well as sellers.”
Tom Cawley, regional director at The Royal Bank of Scotland, adds: “It’s a hard call but you could say that prices will come down, but you will still get a good price for a decent business. If the stock market doesn’t improve quickly then I’m looking to a lot of corporate disposals for my opportunities.”
Cawley, and many others, think that another long-term trend may emerge, with companies deciding to quit the turbulence of the stock markets for the – relatively – more placid waters of private ownership.
A move from public to private is not a decision that is made either quickly or lightly. But many pundits are already picking up on signals that some quoted companies are seriously considering the move. Having troubled times on the stock market may actually serve the interests of some plc management teams, who will be able to buy the business at a lower price.
Mark Audin, corporate finance director at Grant Thornton, says: “It’s not surprising that some quoted companies are looking at going private because of the way the stock market has gone – in fact there is a lot of pent-up supply for public to private.
“Some businesses have been holding back on the idea for four, five, six months because it is a very thorough and exhausting process, but it’s now being widely considered.”
Buckley concludes: “I think that there has never been a better time to do a public to private. There is low liquidity in market place and a lot of frustration that the stock markets have not delivered. Going private needs a long gestation period. It is a conversation that was not happening around the board table last year but is now being muttered.”
