FactSet Mergerstat Flashwire™

Of course, it would be hard to match the US$2.4 trillion worth of deals that took place this year. And others expect that M&A in the coming year will still remain strong even if it does not match the level of activity seen in 2006.

Fewer chief financial officers expect to do M&A in 2007 according to "2007 CFO Outlook" from Bank of America Business Capital. The survey, which polled 600 CFOs from various sized US manufacturing firms, says only about 20% of respondents expect to do an M&A deal.

That's the lowest response in two years. Last year, 30% of CFOs expected to do deal while 23% expected to do deals in 2005.

Jim Cockey, marketing manager for Bank of America Business Capital, cautions that the survey just represents the view of manufacturers. Still, the change from 2006 to 2007 is dramatic.

"I was surprised with the decline in contemplated M&A activity," Cockey said. "Perhaps that's because 2006 has been a bellwether year and for any year to replicate that seems unlikely."

Cockey says the forecasts for decreased M&A may stem from an overall more cautious view on the economy for next year. Only 26% of the CFOs surveyed expect the manufacturing sector to expand next year, down from 33% this year. The number of CFOs expecting the manufacturing sector to contract next year also increased to 35% versus 32% this year.

"It's cautious optimism wrapped around concerns over energy costs, the global economy and further movement in interest rates," Cockey said.

The predicted declines in M&A activity in the manufacturing sector come across the board. Small cap manufacturers, with sales below US$75 million, appear the least willing to do a deal with only 16% of such firms expecting M&A next year. But larger manufacturers with sales between US$500 million and US$2 billion may also be taking a breather with only 27% of respondents thinking of doing deals next year, down from 42% in 2006.

The decreased interest in deal making may actually help stem the increasing multiples seen in many deals. More survey respondents this year compared to last year, 23% vs. 20%, believe that prices for businesses will come down.

Likewise, CFOs appeared a little less bullish on the prospects for their own industry with 27% vs. 21%, predicting that EBITDA multiples within their own industry will decrease in the coming year.

Others are more sanguine on next year's M&A market. Mark Sunshine, chief financial officer of business lender First Capital, says strategic buyers will likely be more cautious toward M&A in the coming year because of continued uncertainties about the economy.

But private equity buyers will likely be bolder since their portfolio strategy should help them weather any downturn in particular industry segments such as manufacturing.

"If a strategic makes an acquisition and it goes bad, it will hurt the company directly," Sunshine said. "But if a private equity firm makes a bad acquisition, it's just one piece of their business so the losses are mitigated."

He does agree the outlook for manufacturers next year is a mixed bag. Interest rates and energy costs remain stable. Yet manufacturers are having to deal with increasing costs in raw materials and employee benefits. Some sectors - like auto parts and home building products - will be challenged enough without the added complexity of integrating acquisitions.

As for one of the main drivers of the hot M&A market - easy access to credit - few see any tightening taking place there. Sunshine says default rates continue to remain at historic lows and the credit portfolios of most lenders remain clean.

"Once some of the businesses in a bank's portfolio show any signs of softening and default rates go up, they will tighten credit," Sunshine said. "At this point, we continue to see a very robust credit market that will continue for the first half of 2007."

Banks and other institutions are expected to keep lending at this year's high multiples of 5 and 6 times EBITDA, says Stephen Perry, Senior Managing Director at private equity firm Linsalata Capital.

"There are no signs the credit markets are tightening," Perry said. Banks and other creditors "are very aware of the industries they are lending into. They look at the business and they will continue to lend more to high-quality businesses in growth industries that have exhibited a good track record."

Perry says private equity will likely be an even stronger factor in M&A in the coming year as they continue to benefit from a benign credit market and an abundance of capital flows into their business.

"I don't see much cooling of the M&A environment, in terms of purchase price multiples and number of transactions and deal value," Perry said. "I think all of those will be high for the next six months.

The information contained within is property of FactSet Mergerstat, LLC. Any redistribution or rebroadcast without the expressed written consent of FactSet Mergerstat, LLC is prohibited by International Copyright Law.

© 2006 FactSet Mergerstat, LLC