The year 2010 saw more action from Connecticut dealmakers than 2009.
But venture capitalists were still not nearly as active as they were before the financial crisis.
But 2011 could be better. At least Connecticut dealmakers think so.
The Association for Corporate Growth and Thomson Reuters polled dozens of investment bankers, private equity professionals, and business consultants in the state and found 77 percent of Connecticut dealmakers expect an increase in M&A activity in the next six months.
Up to 17 percent of those polled see a significant increase coming, while 60 percent are calling for a moderate increase.
“There is pent up demand among the private equity community,” said Ramsey Goodrich, managing director at Carter, Morse & Mathias, a regional investment banking and financial advisory firm in Fairfield. “There have been a lot of people on the sidelines for the last few years. They are looking for a chance to put some of that money to work and the deals they are seeing now are better than they were in the last couple of years.”
The Association for Corporate Growth is an industry group made up of M&A professionals who focus on middle-market transactions valued at less than $1 billion.
Through the first three quarters of 2010, venture capitalists in the Nutmeg State injected $189.2 million in 45 deals compared to $154 million in investments made in all of 2009, according to the latest MoneyTree report, a joint effort of PricewaterhouseCoopers and the National Venture Capital Association.
Goodrich said the increased optimism among dealmakers reflects the general rebound in the economy. More importantly, there’s better alignment between buyers and sellers expectations.
Goodrich said in 2007 many business owners overinflated the value of their companies. In 2008 and 2009, there was just shell shock that paralyzed market. Now fair value transactions are more possible, as business owners come to grips with the reality of the market.
As a result, 80 percent of survey respondents identified the current environment as a buyer’s market.
“Most strategic buyers are looking at the fact that they aren’t getting top line growth so they are starting to say let’s go out and buy it,” he said.
Dealmakers are also starting to see credit thaw, and there is “good credit available for good deals,” Goodrich added.
According to the ACG-Thomson Reuters survey, Connecticut dealmakers expect health care/life sciences, consumer products and services, and industrial manufacturing and distribution to experience the most merger activity in the first half of 2011.
Additionally, the industries that present the best opportunities for the most organic growth are healthcare/life sciences, government-related businesses, energy and technology.
Goodrich said that health care is a big target industry for buyers and sellers because of the state’s demographics. As Baby Boomers age, there is an increased demand for health care services, meaning that investors are willing to park their dollars in that sector.
Surprisingly, health care costs don’t appear to be much of a deterrent in getting deals done in that sector. Only 22 percent of respondents believe that the health care costs are inhibiting investment and as a result of the passage of the health care bill, only 27 percent have changed their investment strategy.
“There are good growth opportunities in that space,” Goodrich said. “There are dynamic changes being forced by health care reform legislation, the maturation of the population and the proliferation of technology that will spur deals.”
Goodrich said a lot of health care technology and business process firms could see the most deal action, along with biotech and drug discovery companies.
Another statistic pointing toward an economic rebound is the jump in the hiring expectations at portfolio companies. Nearly 50 percent of survey respondents anticipate job growth at their portfolio companies, compared to less than 33 percent in the May 2010 survey.
And for the first time, the dealmakers survey asked respondents for their long-term prognostication on the economy.
In the next 24 months, 79 percent of Connecticut-based respondents believe that the economy will improve, with the number increasing to 82 percent when asked about the next 36 months. Only 6 percent believe the economy will get worse in the next 24 months, with that number disappearing to 0 percent regarding the next 36 months.
The greatest drag on M&A activity today is sellers unwilling to sell at multiples offered, according to 37 percent of respondents.
Other concerns are over the uncertainty over the political environment, the weak economy and the credit crunch.
Greg Bordonaro writes the Financial Sense column every other week. Reach him at gbordonaro@HartfordBusiness.com.
