Each of the Big Four accounting firms has scrutinized the corporate divestiture market over the past three quarters and has come up with largely the same conclusions. The divestiture market, they say, is outpacing the mergers and acquisitions market in general. More distressed businesses are on the block. Deals are more complex, and therefore take longer to complete. And the woefully stagnant global economy has created a corporate buyer’s market, at least for now.
The most recent survey from the Big Four came Tuesday from PricewaterhouseCoopers. PwC reports that 60% of the 215 C-suite executives it polled say that a slowdown in divestiture activity over the past 12 months may lead to a “pent-up need to divest” assets as the economy improves over the coming year. Further, the same percentage of executives conclude that current economic conditions “clearly” make it a buyer’s market — with an equal number of public- and private-company executives thinking that way.
Completed in September, the PwC survey includes CFOs and investment-firm partners of both public and private companies. In general, the survey indicates that the future of the economy’s anemic condition and tight credit conditions “remain significant unknowns” for executives involved in the divestiture market. But 69% of them plan for either a similar or increased level of buying or selling activity in the coming year in comparison to the past 12 months.
Another 30% see a turnaround coming and note that a seller’s market isn’t far off. Still, PwC says the results should be viewed with “cautious optimism,” because difficulties in the divestiture market persist. Valuations remain “a moving target” and therefore will continue to constrain mergers and acquisitions, according to the firm.
In fact, 90% of the respondents place the value-expectation gap between buyers and sellers in 2009 as between 0 and 4 turns of EBITDA (earnings before interest, taxes, depreciation, and amortization). With a turn representing 1 multiple of EBITDA, the value-expectation gap represents the disparity between what buyers and sellers calculate as the value of a business. For example, if a business is valued by a seller at 8 times EBITDA based on prior market conditions and current buyers value the same business at only 4 times EBITDA, the disparity between the buyer’s and seller’s valuation would be 4 EBITDA turns, or a 50% value gap.
PwC officials assert that as long as the M&A market stays stagnant, “getting deals done will likely remain a challenge,” adding that “there is no debate that a valuation expectation difference of potentially 50% will likely be a deal breaker for most transactions.”
Overall, 35% of the respondents say they delayed or deferred divestitures this year because of economic conditions. Similarly, 26% of those polled report reduced divestiture activity. Many respondents blame the delays on the increased complexity of the divestiture process, with 51% of respondents reporting that it took 20% longer to close a deal this year than last.
The slower closes were caused by potential buyers’ demands for more information before inking a deal. Indeed, buyers have more leverage in deal negotiations in a sagging economic climate, but protracted deal making is also a result of lenders imposing stricter — and therefore more time-consuming — lending requirements on transactions. What’s more, buyers likely are performing more in-depth due-diligence checks because of the added risk brought on by underperforming businesses that are up for sale.