Special "Mid-Mkt. Credit Crisis" Interview with Brian Boyle, Sr. Mng. Dir./RSM Equico
What is the current status of the "credit crunch"? Can you give us a quick summary of the effects it has had on both middle market and large market M&A?
In middle market M&A, the only significant impact has been in the pricing of debt. We had a transaction that was closing recently -- right in the middle of the credit crunch -- and basically the lenders squeezed an extra 100 basis points out of us. The deal still closed. But the short answer is that equity capital and debt capital are still available in the middle market – they’re just more expensive than before. The tricky piece is really the unsecured segment of the deal. The situation hasn’t changed much with senior debt, at least when it’s collateralized. It's the unsecured piece that has become more expensive. In the middle market, that unsecured piece is a much smaller percentage of the deal than is typical in the bulge-bracket market. There is much more uncollateralized debt in the bulge bracket, mostly debt that has been securitized and then sold to investors, and that bit has totally dried up. It's really put a halt on large deals that rely on a significant amount of subordinated debt. But the middle market, where we compete, hasn't been affected that much, other than in pricing.
Do you expect the large M&A firms and PE firms to start looking into the mid market, where it is easier to close a deal using primarily equity?
Yes, people are moving downstream, but if you are a $5 billion private equity fund you are not going to be doing $200 million deals. At that size, you may be moving downstream a little bit, but it has to be relative to the size of the fund because you need to invest your capital in chunks. You will see a little bit of a drift but you are not going to see, for example, a KKR move into the lower middle market. Middle market is very loosely defined – so you first need to define what the mid-market is. At RSM EquiCo we generally define it as being $10 to $500 million of enterprise value. Wall Street has a different definition – up to $2 billion -- so clearly even the biggest of the private equity firms will do billion-dollar deals that land in the so-called middle market. But it is unlikely the KKRs and those other mega funds will ever move into the lower middle market.
How is the credit crunch affecting the M&A landscape in the Midwest as compared to the rest of the country? Are there any sectors where the impact is more severe? Are any sectors of the Midwest economy more attractive in the current credit climate?
Overall, rust belt industrial companies are not doing as well as, say, business service companies. There are plenty of business service companies in the Midwest, but overall the region has a greater share of older, industrial rustbelt types of companies. In general, the companies doing the best are those with global exposure. When you look at the U.S. economy, you can see it's having some issues, especially from the consumer. Consumers have a lot of debt, a lot of credit card debt, they've lost the equity in their homes -- equity that they've counted on in the past to refinance and use for consumer purchases. They don't have that anymore. There also are inflation concerns. Commodity prices are up, energy prices are up. Combine all that and the U.S. consumer, at least at the middle and lower ends, is hurting a bit and a little nervous.
Companies that have global exposure and are selling in economies that currently are more robust tend to do better. It's not so much a Midwest vs. East Coast or Midwest vs. West Coast. The issue is whether a company is strictly domestic or is competing globally. If it's a domestic company, especially an old line industrial company, and is solely relying upon the U.S. economy, it's probably not doing as well as its owners would like. In general, business service companies, even those with a domestic focus, have lower capital expenditures and often tend to be a bit more growth oriented.
How are sellers reacting to the current M&A climate? Buyers?
At RSM EquiCo we’re still very active. We may be seeing a little bit of price compression off of the highs of 2006, perhaps half a turn off of an EBITDA multiple. A company that was trading at 7 times EBITDA in 2006 might trade at 6.5 times in the second half of 2007. So we have seen about half a turn of compression on pricing. But there's still a lot of activity and plenty of liquidity. According to the most recent figures I’ve seen, there is something like $375 billion of equity capital out there. And that's just among the private equity groups; it doesn’t include strategic acquirers. Moreover, that's the unlevered total. So there is still plenty of capital out there, plenty of purchasing power and plenty of activity. There may be a little bit of price compression, but by historical standards there is still a lot of liquidity.
Do you see the credit crisis swinging the pendulum back toward strategic buyers and away from the PEGs, or do you expect the PEGs to continue to be very active?
I would say that the pendulum will definitely swing back in the larger deals; that's already happened. We've seen several private equity deals in the bulge-bracket-mega-cap area already fall apart. In the lower middle market it's still a fairly balanced playing field. I don't see an edge one way or the other.
Other final thoughts?
The crucial question is how long this consumer credit issue continues. It all comes down to the U.S. consumer. We’re starting to see some weakness in the stock market, and the news media is playing this up aggressively. It almost becomes a self-fulfilling prophecy. If this continues and the consumer starts pulling back it will affect things further. Companies will not do as well. The private equity folks have an edge when the earnings are there, because then they can bring in the leverage. Lenders lend when there are robust earnings. If the economy starts going down, and earnings start to decline, then obviously the private equity groups won’t be able to get lenders to put in the same amount of debt, and that would swing the pendulum back to strategic acquirers. We have yet to see that happen in the middle market.
About Brian Boyle
Mr. Boyle has more than 20 years of capital markets experience, including 13 years with Lehman Brothers as senior vice president in its New York headquarters. In addition, he founded and ran his own investment firm, Capital Placement, focused on middle-market advisory services, corporate finance, and mergers & acquisitions. Mr. Boyle joined RSM EquiCo in 2000 and has successfully negotiated and completed numerous sale and recapitalization transactions in a variety of industries. Mr. Boyle received a bachelor's degree from the University of Pennsylvania’s Wharton School of Business. He holds FINRA Series 7, 24, and 63 securities licenses.
About RSM Equico
RSM EquiCo Capital Markets LLC (www.rsmequico.com) is a global provider of investment banking services to private and public companies with annual revenues of up to $1 billion. The firm brings together companies, capital and creativity on a national and international scale to help clients achieve their personal and strategic objectives.
RSM EquiCo Capital Markets is licensed by the SEC and all state securities authorities, and is a member of the FINRA and SIPC. The firm’s international headquarters are located in Costa Mesa, Calif. It also has offices in Chicago, Boston, New York and London.
