The day of the smaller, sustainable deal has arrived

The party’s over for private equity houses seeking to fund large-scale deals on the back of massive debt. M&A's Andrew MacLeod reports on why small ones really are more juicy

The party’s over for private equity houses seeking to fund large-scale deals on the back of massive debt. M&A’s Andrew MacLeod reports on why small ones really are more juicy

The party’s over for private equity houses seeking to fund large-scale deals on the back of massive debt.

The consensus view of a number of East of England dealmakers seems to be that the bumper year just gone will not be repeated in 2008. However, the same insiders reckon that enough momentum may well be maintained to keep a steady supply of transactions in the pipeline – although well below the ‘mega-deal’ level triggered by cash rich private equity funds.

Simon Gillings, who is based in the Cambridge office of Ernst & Young said: “On the M&A front, 2007 was the busiest year I can remember, but this changed towards the end in the wake of the global credit crunch.

Pub operator M&B, a major client of Ernst & Young’s Cambridge office, was one of the first high profile casualties of the global lending crisis, with an aborted £4.5 billion deal involving its biggest shareholder, Robert Tchenguiz, to create a property venture. According to reports, the deal collapsed when nervous bankers pulled the plug.

International crisis notwithstanding, however, Gillings reports that there is “a lot on the block” in terms of M&A activity in the opening stages of 2008, and that the chances remain good that the East of England will enjoy a better-than-average 2008.

However he does point out that there will be a marked change in the mix of deals, and how they are funded.

With finance hard to come by – and increasingly expensive even when it can be obtained – the face of M&A will change.

Deals are likely to be smaller, for one thing, bringing an end to the purple patch that the PE sector has enjoyed in recent years, which was fuelled by the unprecedented levels of cheap money.

In the coming year, private equity will be focused on a narrower range of deals, says Gillings. Indeed, he believes, the change in the mix will favour corporates less dependent on debt in the deal-making arena.

‘Small is beautiful’ might also be the mantra taken up by Lawrence Bailey of chartered accountants Price Bailey, which has offices in Cambridge, Norwich and Ely – and an ear to the ground throughout the region.

He and his colleagues deal in the main with transactions under the £20 million mark – a price range that remains relatively immune from the aftershock of the credit crunch, and which he believes will keep his firm busy at least until the end of March. “Possibly,” he says, “well beyond.”

Price Bailey completed an average of two to three deals a month in 2007, throughout East Anglia and the rest of the country. The firm’s main market is among SMEs, and activity during the year spanned a number of sectors. “Some of them were small, and others quite large,” says Bailey.

“Our bread-and-butter work is the sale and purchase of companies, valuations, and that sort of thing, and we have been kept busy over the past 12 months doing due diligence for banks and potential purchasers.”

Bailey added: “It’s often the case that you have an owner-managed company run by a couple of shareholders in their fifties, and succession is a real issue for them because the children that might have taken over the business aren’t interested in getting their

hands dirty.”

In these circumstances, they have little alternative than to hang up the ‘For Sale’ notices.

Anecdotal evidence is that in the high-tech arena for which Cambridge is renowned, there has been little if any, M&A activity. Instead the action here has been largely centred on funding rounds, which often presage an exit.

Boyd Mulvey, co-founder and CEO of CREATE Partners, which manages the CREATE East of England Fund specialising in early-stage investments, also reports a busy year – particularly in the area of second-round investments of up to £2 million.

Naturally, new technologies including pharmaceuticals loom large in the fund’s activities.

Mulvey believes activity will slow considerably in the coming year, warning: “As a whole I don’t think 2008 is going to be as good as 2007.” In fact, he says, the world of M&A could be facing a rough ride for the next two years or so, although he takes a pragmatic view.

“Things couldn’t have continued indefinitely on the path they were on,” he explains. “We had a good two or three year run, and the time has come for an adjustment.

“How long that will take no-one really knows.”

Marc Barber

Raven Connelly

Marc was editor of GrowthBusiness from 2006 to 2010. He specialised in writing about entrepreneurs, private equity and venture capital, mid-market M&A, small caps and high-growth businesses.

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