Monday, May 17, 2010

M&A's new contours: The Re-financing time bomb

Ken McFayden came out with an excellent article in the latest version of the IDDMagazine. I will try to summarize it and add my own take on the thing..... 

The article describes how valuations in M&As are falling short of valuations. Recently the S&P 500 and Dow Jones industrial average hit 18 month highs owing to factors like better employment reports, improving ISM number indicating an improving economy. While the PIGS’s debt problems have reduced some of the gains in stocks, the broader indexes remain high. The bullishness for stocks, however, doesn’t necessarily preclude acquirers from bargain hunting, as some deal pros believe that in the current environment — marked by rising share prices and looming questions over financing — “take-under”’ could become a more common occurence.

This new undervaluation is due to the fact that few CEOs are seeing any material earnings growth, and most recognize that down the road the cost of capital is ­climbing. With the stimulus winding down and the Fed indicating its accomodative stance might be moderated, companies are realizing that capital is going to be expensive down the line.

Re-financing Time-Bomb: According to IDD and Fitch, roughly US$ 770 billion in leveraged loans will come due by 2015. This may leave companies with no alternative other than to find a buyer, even if the sale price represents a discount to the market valuation. This was the option facing InfoGroup in March. The Omaha, Neb.-based consumer database provider agreed to a roughly $460 million deal, valuing the company’s stock at $8.00 a share. Private-equity firm CCMP Capital Advisors, the buyer, submitted the best offer, which came in under InfoGroup’s share price, opening at $8.16 a share on the day the deal was announced.

Indeed, as Government support winds down PE driven M&As are likely to pick up pace as firms look elsewhere for support.

                           IDD Magazine May 2010: Underwriting Fee Table

HP-Palm Deal: Most recently, analysts speculated that Palm Inc. could have been the latest take-under target after a lackluster earnings call in March. The problem facing Palm is the cost of capital, as the company, as of press time, had US$591 million in cash and short-term investments, but was burning through its funding with losses amid weak sales and high research-and-development and marketing costs. The US$1.2 billion sale to Hewlett Packard represented a premium to the company’s stock price immediately ahead of the sale, but was valued significantly less than a secondary offering, floating shares at $16.25 per, in September. Again, the growing cost of capital and the impending refinancing issue loomed large.

As a leading commentator notes unless performance improves markedly a lot of acquirers will have grief down the line as the value of the acquired firm will be considerably less. I think that add the debt bomb and the transfer of debt burden to the private is enough to give the toughest folks guaranteed sleepless nights......

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