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M&A activity in 2009 will be fuelled by “mergers of necessity”, says PwC

If current conditions continue into the New Year and financing remains limited, mergers and acquisitions activity in 2009 will be on the light side with a few silver linings, according

If current conditions continue into the New Year and financing remains limited, mergers and acquisitions activity in 2009 will be on the light side with a few silver linings, according to PricewaterhouseCoopers.

It says the deal landscape will be dominated by distressed investments across sectors including financial services, automotive, consumer products and retail.

"Troubled companies will look to align with larger, stronger players in order to survive, creating the perfect storm for mergers of necessity," says Robert Filek, a partner in PricewaterhouseCoopers’ transaction services group.

According to Thomson Reuters, announced US activity through 30 November 2008 totalled roughly USD1.1trn compared to USD1.6trn for the same period in 2007.

Total deal volume for the 11 months of 2008 was 8,190, a 22 per cent decrease from the same period in 2007.

Trailing monthly deal volume from 2007 to November 2008 revealed a grim picture: during 2008, the lack of liquidity had affected acquirers’ ability to do deals, especially private equity.

The number of transactions by private equity acquirers through the end of November 2008 fell by 24 per cent to 1,383, while deal value plummeted by 75 per cent to USD127.4bn from USD501.7bn during the same period. Private equity presented just 12 per cent of the 2008’s deal value, a significant plunge from 2007.

"Private equity players will be challenged to find new and innovative ways to put their money to work and to find deal mechanisms that can drive the kinds of returns their limited partners expect," says Greg Peterson, a partner in PricewaterhouseCoopers’ transaction services group. "Historically, it has been during a downturn when strategic buyers and private equity firms have their best buying opportunities, yielding the best returns. The key will be the availability of financing."

PwC says the latest available US bankruptcy data shows there are growing opportunities in buying troubled assets.

The number of US businesses filing for bankruptcy has been on the rise. In the first half of 2008, business bankruptcy filings totalled 18,456, the highest half year total since the second half of 2005.

It has been widely reported private equity firms are actively raising distressed funds to invest in these assets. According to Private Equity Intelligence, distressed funds have raised a total of USD36.8bn in the first half of 2008, signalling activity to come.

PwC believes President-elect Obama’s stimulus plan may generate opportunities for both private equity and corporate buyers. The plan emphasises investments in the nation’s infrastructure, energy efficiency and technology to increase broadband access and effectiveness in healthcare.

The investment in infrastructure appeals to private equity acquirers as they have been active in seeking infrastructure opportunities and raising funds to focus on this sector.

Peterson says: "There are also strong financial incentives for state and municipal governments to enter into public-private partnerships in infrastructure to limit the stress on their finances."

During 2008, companies not only turned to sovereign funds for cash infusions, but they are relying on PIPEs (private investment in public equities) as well.

As of 12 December, PIPE transactions totalled USD109.7bn, surpassing the 2007 full year amount of USD83.5bn. PwC says this trend is likely to carry into 2009.

Sectors that PwC says continue to present opportunities include: financial services; energy – the decline in stock prices over the past several months has created opportunities to acquire regulated utility or merchant companies and generation assets at a discount versus historical multiples; automotive; consumer products; healthcare – the new administration’s goals include expanding access to quality and affordable health insurance, modernizing healthcare, reducing costs, and promoting public health, prevention and wellness; technology; and retail.

PwC says one of the key issues facing the private equity industry will be any potential change in tax policy in the US around carried interest and capital gains. With the dry spell in M&A activity and lack of financing, the New Year will test the private equity business model.

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