CEO Report: M&A Outlook
Q: Nearly 80 percent of CEOs surveyed last year by NYSE Euronext said the M&A market was either exceptional or good. Will it be just as good in 2010 and beyond, and how are you responding?
Safeguard is looking forward to more activity on all fronts. Strategic buyers are back in the hunt with capital to deploy but find themselves competing with private equity buyers who are attracted by the low valuations that resulted from 2009’s slow economy. We see significant opportunity on both the acquisitions and exit side of the equation and have told our partner companies to be opportunistic regarding potential M&A activities.
Coal is the fastest-growing fuel in the world, and the M&A market in this industry is quite lively. We see China Inc. re-rating coal assets all over the world as it looks to secure stable energy resources for the long term. The global coal industry remains highly fragmented, and that presents an abundance of opportunities for Peabody, the world’s largest private-sector coal company. We intend to grow organically and by acquisition in the coming years as we implement our aggressive growth plans.
We will see strong deal flow given several factors: a focus among leaders to drive growth, geographic reach and top-line diversification; rising accessibility of capital for well-rated companies; and an available pool of attractive opportunities. That said, valuations must be appropriate and will likely be more scrutinized. At KCI we are supporting our strategic objectives to bring sustainable growth platforms on board, add enabling technologies and acquire value-added operations and skill sets.
We may be in the minority, but we would have said the M&A market in 2009 was just “okay.” For 2010 the M&A market will improve somewhat, but for the typical deals we consider (generally from private lower middle market companies), seller valuation expectations generally do not reflect today’s economic environment. However, we continue to monitor potential opportunities, and we have the financial flexibility to move on the right opportunity when it presents itself.
A number of large pharmaceutical companies merged over the past year to reduce costs and gain efficiencies. In addition, we’ve seen our pharmaceutical clients increasingly turn to innovative, strategic partnerships with contract research organizations like Covance to help improve R&D efficiency. Through accelerated use of outsourcing, they can create a more flexible R&D cost structure, devote more time and resources to core competencies and speed new product development timelines. With the extraordinary patent cliffs on the near-term horizon, we expect to see a steady increase in these types of strategic alliances.
The world is past the economic crisis and in the midst of a profound transformation. Asia and the Middle East are growing rapidly in terms of population and economic power, shifting the global balance away from its traditional OECD (Organization for Economic Cooperation and Development) center. In addition to joint ventures and strategic partnerships, M&A will continue to be among the tools that established players, like Total, use to consolidate in mature markets and expand into new ones. And the pace of this transformation will accelerate.
Packaging companies with strong balance sheets have been able to participate in the ongoing industry consolidation, even during challenging economic times. In 2010 and beyond, we expect continuing consolidation in the packaging sector. Bemis Co. has one of the strongest balance sheets in the industry, and we have completed more than 18 acquisitions in the past 20 years. We continue to look for acquisition opportunities that will enhance our growth prospects and expand our technologies into new applications and new geographic regions.
