Signal Hill Blog: Analysis & Perspectives

Our Speidy-sense is telling us that Disney’s acquisition of Marvel may be a good sign for the M&A market ahead. Disney announced that it is acquiring the comic book giant in a strategic acquisition — paying $50 a share and valuing the company at approximately $4 billion with a Deal Value/Revenue multiple of 5.9x. At Updata, we have a number of clients with the same mindset — new sell-side clients who are not distressed and looking for a reasonable M&A exit, as well as buyers who are looking to grow strategically through acquisitions of healthy targets at rational values.

Disney’s acquisition of Marvel is the first of a potentially changing M&A landscape — it is relatively large, is not being done for distress purposes and has Disney paying a healthy price (29% premium to public value). Michael Corkery of the WSJ believes that Disney may have broached a psychological barrier in M&A by completing a deal that neither company says it needed to do. According to CEO Robert Iger:

“This was a company that we admired that we saw growing right before our eyes, that we were impressed with. So it was not driven by anything other than continued interest in what Marvel is and what they have done. We don’t have any…problematic strategic holes. We did not have any situation that in any way suggested that this was a must-do deal.”

The end of August also brought another similarly thought out deal with Baker Hughes’ $5.5 billion acquisition of BJ Services. The purchase price represents a 16% premium over Friday’s closing price and both companies explained their rationale behind the transaction was simply that a combination would allow both to better compete in their markets. This new found gall for deal that are simply beneficial for the buyer and seller could serve as kick start for other companies with larger cash reserves and sturdy balance sheets looking to get back in the game, such as Apple and Microsoft, which both have about $25 billion in cash on hand, Cisco, which has about $29 billion, and Google which has nearly $18 billion.

Although two deals does not necessarily mean an M&A boom is on the horizon, if Q2 was any indication, deal volume is starting a rebound. Updata’s database shows software deal volume has generally followed total deal volume for the U.S. for the past few years (with the exception of Q4 2007 and Q1 2009, where software deal volume trended higher). Our data shows that deal volume spiked in Q2 at $25.4 billion and Q3 is already nipping at the heels of Q1’s $6.9 billion and should easily surpass it with September’s help.

We believe there will be increase in M&A activity in the near term due to a number of factors, including:

• The rebounding equity markets, which are highly correlated with M&A activity levels;
• An eventual reopening of the IPO market, which will allow companies to deleverage as well as increase working capital reserves, which can potentially be used for acquisitions;
• Substantial private equity capital available for investment, as many funds have held off on making investments in the past year;
• Increased reports showing optimism that the economy is finally on the rebound and that the worst of the last year is now in the past.

It is likely, however, that it will take several months before actual announcements are spurred from this recent deal activity. As the markets continue to move past the devastating events of last September, companies will likely begin refocusing their attention back on traditional M&A and less on their own survival. If, as we expect, sellers have “reasonable” expectations and strategic buyers start to step up to the plate, the M&A market will begin to return to more normal levels.