M&A 2008? Bring Your Checkbook

The landscape for mergers and acquisitions has changed across all industries; commercial real estate is no exception.   In 2008 deals are likely to be more strategic probably smaller and involve less debt. But we’ll still see plenty of deals.

In 2008 we should see lower prices certainly and more globalization as U.S. buyers reach overseas and sovereign wealth funds invest here in the States.

Banks are tightening down and not lending as much to buyers. According to the Wall Street Journal in February “The Federal Reserve’s latest survey of senior loan officers showed 80% of domestic banks tightened lending standards on commercial real-estate loans in the past three months — the highest level since the question was first asked in 1990.”[1]

No problem: in most cases the people who will buy this year aren’t going to banks. They have the money and they’re looking for the right opportunity.

The private equity risk profile is changing.
2008 looks like a year when private equity tempers its appetite for deals with a touch of caution.

In recent years hedge funds and private equity deals have been dominant. What were these buyers looking for? They had cash to invest and they were willing to spend 9 and 10 times EBITDA to make a deal. They moved fast took on risk and (in some cases) acquired companies whose operations like residential fixer-uppers turned out to have that “money pit” feeling to them.

Parts of that equation haven’t changed. Private equity funds still have cash to invest – but their risk profiles are definitely changing. Prices are coming down – more like 5 or 6 times EBITDA – and due diligence is ramping up. Sellers should be prepared for deeper closer review of their financials and their operations. Problems that might have gone unnoticed or just glossed over in previous years could stall or kill a deal in 2008.

Special purpose acquisition companies are on the rise
An emerging player in the M&A market in 2008 could be an ordinary investor participating through a SPAC.

Special Purpose Acquisition Corporations (SPACs) have existed since the 1990s particularly targeting technology healthcare media and a few other select industries.   SPACs are publicly traded investment vehicles that allow shareholders to participate in the type of acquisitions generally performed by private equity firms. These vehicles go public with no other purpose than finding a merger or acquisition to complete with the proceeds of their IPO.

Since 2003 SPACs have been on the rise. According to Dealogic a provider of global investment banking and analysis 65 SPACs launched last year to raise approximately $12 billion. These offerings represented 22% of all IPOs and a significant increase from the 37 started in 2006.[2]

Unlike private equity deals anyone can buy shares in a SPAC. Because they are public investment vehicles they are regulated. Specific time frames are required for an investment to be found and consummated with majority shareholder approval. But similar to private equity their deals don’t require debt. Once the credit markets rebound these deals may be candidates for refinancing.

Sellers might find advantages in being acquired by a SPAC. In these deals the company’s management is allowed to continue running the business and benefit from the upside of public market participating including the access to capital. Typically the board will include the original management team as well as members of the SPAC team.

Be diligent. Be very diligent.
When buying a company whose primary asset is commercial real estate location location and location remain key factors.  But in this economic climate data data and more data –- due diligence — should be top of mind for potential buyers.  Sharper eyes and more targeted due diligence are sure to characterize deals of any type in 2008.

If you’re buying get comfortable with:

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