BUSINESS VALUES AND M&A ACTIVITIES ARE UP
By: George D. Abraham, President , Business Evaluation Systems

As a Business Appraisal company it is hard to determine, with any degree of accuracy exactly how much the overall values are up. Since there are so many different industries, any overall conclusion would be totally misleading. However, from our own records, many industries did rise in value and the amount of companies we valued for contemplation of sale rose dramatically in 2004. This alone indicates that there was an increase in the Mergers and Acquisitions (M&A) activities, since more owners were having their companies valued. From our own research, we feel that the lowest level was 2002 and the activity, in our company, started in September of 2003 and has been building steadily since then. The main thing we noticed is healthier balance sheets, increasing inventory levels and revenues in most industries increased and are still growing. Owners seemed to be more optimistic about the future than we have seen in a long time. We were able to talk to Shannon Pratt of Business Valuation Update, and the most prominent author of Business Appraisal books and research in the industry, while on his way to the airport and he also, felt that 2002 was the bottom and the multiples were rising. In Shannon Pratt’s December, 2004 Business Valuation Update newsletter, shows some excellent research on multiples for several industries from 1998 through the third quarter of 2004.

Chris Mercer of Mercer Capital, a leading business valuation author who’s company is one of the largest independent valuation firms in the nation and the only such firm that has an expertise in financial institutions, in his December 2004 newsletter stated “Without question, 2004 witnessed substantial M&A activity, as the aggregate transaction value rose to a level not experienced since 1998.”

A phone interview with Jack Sanders, creator of Bizcomps, one of the leading data bases for comparable sales, indicated the same problems we had in trying to determine some kind of meaningful growth percentage in that there were just so many different types of industries and any overall growth percentage would be misleading. However, he did say that the ratios throughout the years have kept fairly consistent. This is not surprising, but realize, when profits are down or up, even using the same ratio’s will have a significant impact on value.

Consistent with our in-house research, the February 2005 edition of Inc. Magazine, in its “Small and Midmarket M&A Activity Rose in 04” article stated “Both the volume of deals and their value rose sharply, according to Mergerstat, an M&A research firm based in Santa Monica, California. Through the first three quarters of 2004, Mergerstat reported the closing of 3,394 small or midmarket deals (those worth up to $500 million each). That’s a 40 percent jump over 2003. Equity valuations surged ahead by 68 percent.” The article goes on to say that the latest figures mark a return to the level of activity seen prior to the dot-com meltdown.

Also, BusinessWeek online on December 27, 2004 in its article “Mergers: A Bit of Mania for 2005” stated “Conditions are shaping up to favor more dealmaking next year. Though still not a boom, the action should be plentiful”. Later on in the article it speaks of a calmer environment and that several of the problems that made CEOs wary of M&A in 2004 were the electoral and regulatory uncertainty, rising oil prices, disappointing job growth, and a stock market that often resisted merger plans. According to the article these have abated.

As balance sheets get healthier, revenues keep growing and increasing levels of inventory are rising, we feel the near future is going to be bright for business values and M&A activity