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The state of Virginia’s M&A market
Smaller deals dominated
2004; a boost in activity expected for 2005
by
Braun Jones III
For Virginia Business
February
2005
When
it comes to mergers and acquisitions, Virginia is keeping
pace with the rest of the country. Last year, more than
200 Virginia companies were either merged or purchased,
representing an annual increase of 26 percent compared
to 22 percent for the rest of the country.
Rather
than skew value by keying in on a few multibillion-dollar
mega deals, a more meaningful analysis resides in what
is known as the “middle-market,” generally
defined as companies with less than $500 million in
revenue. After removing transactions totaling $1 billion
or more that represent only a small slice of the market,
Virginia’s total M&A disclosed value was $6.2
billion in 2004, compared to $5 billion in 2003 and
$9.1 billion in 2002.
Although middle-market M&A activity has been fairly
stable in recent years, there have been some intriguing
developments within middle-market sub sectors. For example,
deals worth less than $50 million accounted for 65 percent
of the activity in 2004 compared to 48 percent in 1999,
suggesting a trend towards smaller deals.
Another potential indicator of a higher number of smaller
deals is the relative number of M&A transactions
where deal terms are disclosed publicly. Many middle-market
M&A transactions involve private companies and often
the terms of the transaction, such as purchase price,
are not disclosed. For example, 43 percent and 35 percent
of the total M&A transactions were disclosed in
2002 and 2003, respectively, as opposed to 28 percent
in 2004. Given that smaller deals are less likely to
get reported, one could argue that many unreported deals
are smaller in size.
Industry
observations
Most of Virginia’s major industries experienced
transaction volume increases in 2004. Two industry sectors
that warrant further focus are telecommunications and
information technology. The telecommunications sector
experienced an M&A volume rebound from 6 in 2003
to 11 in 2004. Although, telecommunications M&A
activity is down from 1999’s 18 transactions,
the data suggests that the sector is in the early stages
of recovery. Moreover, large transactions, such as the
$45.3 billion acquisition of Nextel by Sprint Corp.,
could lead to additional activity in the middle-market
from both strategic and financial buyers.
Within the information technology sector, government
contractors continue to dominate the M&A transaction
landscape. In Virginia alone, six companies, including
SI International, SRA International, and PEC Solutions
conducted initial public offerings (IPOs) between 2000
and 2004. After their IPOs, the companies are compelled
to show Wall Street high growth, have high stock prices
and are flush with cash, key ingredients for an active
M&A strategy.
Looking
forward
For the middle-market, several factors suggest M&A
activity will strengthen in 2005. After the stock market
and economic downturn beginning in 2000 and the terrorist
attacks of 2001, many companies have operated at a conservative
pace. Reluctant to make significant investments, they
are now flush with cash. High cash levels and rising
valuations, combined with an expanding economy, should
contribute to higher M&A volume during the next
12 months. Additionally, the U.S. dollar’s recent
decline has attracted interest from international acquirers.
Good examples of international players using their strong
currency to enter the U.S. market include BAE System’s
$600 million purchase of Virginia-based DigitalNet Holdings
in September and Serco Group’s $215 million purchase
of Virginia-based Resource Consultants in December.
Within the federal technology sector, several emerging
catalysts could bolster activity this year. They include
a slowdown in growth for many large public contractors,
traditional commercial IT players looking to diversify
their businesses, and the desire to shift revenue mix
to high-growth homeland defense and intelligence sectors
where an abundance of niche service providers are prepared
to enter the M&A market owing to the premiums being
offered.
Finally, as the economy expands — albeit at a
modest pace — Wall Street’s appetite for
growth may only be appeased through mergers and acquisitions.
Braun Jones III is president and co-founder of The
McLean Group, a private investment bank providing merger
and acquisition, valuation and private equity financing
services.
Sources:
All transaction statistics gathered from CapitalIQ,
LLC.
Data for each calendar year represents transactions
up to December 16, 2004.
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