Preparing for the 2005 M&A market

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The turnaround in the M&A market that so many sellers had been waiting for finally came about in 2004. The total number of deals jumped from 82 in 2003 to 124 in 2004-56 of them b-to-b deals. And b-to-b's recovery has been particularly strong. In 2004, five of the DeSilva & Phillips 15 Top Deals of the year were b-to-b transactions. In 2003, the number was three. In 2002, the number was zero.

The trend continues in 2005. To date, there have been 17 deals. These include the New York Times Co.-Primedia deal for for $410 million, and three others in the $10 million-to-$22 million range. Of the 17, at least 14 were b-to-b deals. Most interesting is the return of strategic buyers, who were dormant in 2004. Last year, private equity represented 94% of all buyers. But in 2005 so far, strategic buyers outnumber financials by a ratio of 5 to 3.

There are some significant properties on the market right now as well. There will be two deals taking place at more than $500 million each, probably with private equity buyers; three more at around $100 million each, also likely with financial buyers. Strategics will be active buyers in two deals between $10 million and $35 million and four more at less than $10 million.

The debt market is highly favorable. Lenders are making senior debt available in a range (depending on company size) of 4-to-8 times EBITDA. Mezzanine financing-providing 1-to-1.5 times additional capital-is another option.

In this pleasant market, I get calls every day from company owners asking about the market and what they can do to prepare their company for sale or recapitalization, or wondering about making an acquisition themselves.

The preparation process is fundamentally the same in any of these situations. You have to understand how others-buyers, sellers or financial institutions-will look at your company and what criteria they will use to evaluate it.

In our experience, here's how others will evaluate your company. Buyers, sellers and lending institutions alike will ask the same questions:

  •  What is the growth vector of your market: high, with double-digit annual growth; medium, with growth in the 5%-to-9% range; low; or flat?
  •  What are the characteristics of your company's top and bottom line? Based on your revenue, how big a company are you? How stable is your revenue number? It may be dependent on a single revenue stream, or diversified among such components as advertising, paid subscriptions, newsletters, books, online revenue, syndicated or custom research, events (and within events, revenue from exhibitors and attendees).

Looking at your cash flow and EBITDA, buyers and lenders will evaluate the stability and growth patterns of your free cash over the past three years.

You'll also find buyers and lenders looking at your growth prospects in both revenue and EBITDA. They'll be looking at your ability to grow your numbers in existing properties, in new product launches, Internet initiatives and possible or planned acquisitions.

Finally, there are the judgment calls. Lenders and buyers will make a judgment about your management team's experience, capability and depth. They will make a judgment about the replicability of your business model: Can your management team expand the model to work in new markets or with new media? Can they handle growth in your core business, launch new products, work in new markets? It's up to the buyers to make these judgments, but you can help them by the quality of your preparation and by anticipating these questions.

Finally, a word of advice. As you anticipate these questions, you should make your company ready at all times to provide the due diligence materials to back up your answers. Timing is everything. You can shorten and control the documentation and transaction process, which usually takes four months, by being ready to answer the questions outsiders will ask.

At the very least, you should constantly maintain your company's financials, including details on revenue streams, and the materials an outsider might need to evaluate the markets you serve. A confident and well-documented presentation will help increase the multiple your company obtains from a buyer or a lender, and your ability to move in a timely fashion will enable you to seize an opportunity quickly in changing markets.

Roland A. DeSilva is managing partner of DeSilva & Phillips, New York. He can be reached at

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