Compass Report--The State of M&A
Maybe you did not sell in 1998, but would like to sell now. Your numbers are the same now as in the 1998 scenario shown. Except today you will be lucky to engage any competition at all. If you do, it will be between perhaps two or three somewhat ambivalent and distracted buyers. And, instead of six times EBITDA, you will get a best offer of only five times, or $9 million. When you subtract the $2.8 million in debt, your equity has shrunk from $8 million to $6.2 million—a decline of 23 percent.
You will protest during the transaction that your buyer in 2000 paid seven times EBITDA for the same type of company back in 1998. Your buyer will tell you that its stock price in 1998 was 15 times EBITDA and, today, it is less than half that amount. The buyer will also respond that its transactions must be accretive rather than dilutive. This means, of course, that your deal must contribute to earnings per share rather than subtract from earnings per share—no matter how small your drop is in the buyer's bucket.
There are fewer active buyers for private companies. "The Compass Report—1999" Deal Log contained 186 transactions completed by 65 different buyers. This year's report contains 131 deals completed by 39 buyers. Many of the 65 in 1998 and many of the 39 in 1999 were strategic buyers who made only one or two acquisitions for market share or vertical or horizontal integration purposes. These buyers differ from consolidators who employ a rollup and earnings growth strategy to build value.
The consolidators who numbered about 15 on January 1, 1999, amounted to no more than five or six at year-end. Some of those consolidators that remain active can be characterized as passively interested or highly selective. Only three buyers can be characterized as aggressive.