First, the good news. If you’re at a firm that’s flush with cash and looking to purchase a company, now is a pretty good time. If not, you’re up a tree, at least until the credit markets come back.
But it’s a pretty accurate portrait of the angst in the heart of every entrepreneur who built their pitch on the following assumption:
“The company should be poised for a lucrative exit to a large medical device firm.”
Daniel Lepanto, a managing director of mergers and acquisitions at Leerink Swann , called the current environment “very challenging,” noting that there’s an abundance of supply and very little demand, which mostly breeds fire sales. M&A activity was down 37 percent overall in 2008, according to Lepanto.
“We’re trapped in a deflationary psychology,” he said. “Investors believe ‘All I have to do is wait one more day and the price will drop.'”
The numbers of buyouts and mergers weren’t just down significantly, Lepanto said; the average value of the typical deal was down 67 percent from 2006 and 2007, which turned out to be the heyday for big-money mega-deals (hey there, Guidant!).
“M&A dollar values are half of the mean of the last 10 years,” he said, noting that the average deal value is around $288 million, a level not seen since 2002. The root cause? Valuations are way down since the credit market froze last fall. Without that leverage, buyers are looking for cash-positive companies and their tolerance for risk is minimal. Buyers just won’t pay for potential anymore.
The average multiple on a buyout has dropped as low as 1 to 1.5 times revenues, an unthinkable level just three years ago. Lepanto called it a paradigm shift.
“People are looking for commercial-stage assets,” he said.
Medical device sectors faring better than others are, not surprisingly, cardiology, orthopedic and spine companies, which all seem to draw more interest from an M&A perspective.
One good thing might be the return of the big dogs to the buyout market. LePanto said for the past five or so years, M&A was more the terrain of the mid-cap company looking to step up to the plate. But large cap companies are coming back into the fold, flush with cash and ready to buy companies for the “price of a lifetime.” LePanto termed this as companies coming in to “defend their franchise.”
As for a forecast, Lepanto said the future will likely get better as the damage has already been done and the fundamentals of the industry remain relatively strong.
“At the end of the day, mergers and acquisitions remain a critical component for med-tech companies. If it’s all psychological and the fundamentals are indeed intact … I think, with the stabilization of the capital markets, you could see this all turn on a dime.”