March 29, 2011

A Nudge from the Administration

In the April issue of Mergers & Acquisitions, in a section titled “A Nudge from the Administration,” senior folks from around the industry commented about President Obama’s call for corporate investment. Out of over 35 submissions, six investment experts” comments were printed. One of them is Phoenix Capital Resource’s Adam Cook. Click here to see the entire article.

Question

President Obama, in his speech at the U.S. Chamber of Commerce on February 7, challenged companies to begin to invest the estimated $2 trillion dollars they currently have in reserves. Recent data from PitchBook suggests a more than $465 billion private equity overhang. With these statistics in mind, what impact is this significant available investment capital having on the corporate growth environment?

Adam Cook’s Response

The remarkable amount of cash available for investment has had quite an impact on the transactional landscape and, in my opinion, will continue to do so over the next few years. The demand for “quality assets” is extremely high, while the supply is still constrained, causing fierce competition for buyers and lenders alike, the impact of which is already being felt. Corporate buyers, financial sponsors and providers of credit are all feeling the pressure to compete in this marketplace. M&A purchase multiples for transactions over $100 million in revenue and $10 million in EBITDA have not only recovered, but have flourished. Covenant light credit is available for the same size asset class, with credit providers routinely providing air-ball stretch pieces, while pushing leverage coverage ratios to the max.

This market dynamic has caused transaction multiple variances between strategic buyers and financial sponsors to come closer together, leverage on balance sheets to increase as a result of dividend recap and financial sponsor activity and has provided a life line for challenged businesses that could not find credit in 2009. As a result, companies in play during this time may begin to feel the effect in the intermediate term when their cost of capital increases as a result of: higher interest rates, commodity price fluctuation, and other inflationary pressures.

Over the next two years, especially with tax treatment policies expiring at the end of 2012, we should continue to see sellers of quality assets come to market, while challenged and healthy companies should find credit more attainable and attractive. What the future holds beyond 2012 remains to be seen. With credit maturities looming large, the ability to amend and extend hanging in the balance, and uncertain global economic and political landscapes, it could get very interesting. Will U.S. companies be burdened with another layer of debt as a result of the significant investment capital available in today’s market? That’s a question in need of answering.

Adam S. Cook is a Managing Director and Head of Investment Banking for Phoenix Capital Resources, a NY based special situation middle market investment banking boutique.