With unprecedented levels of cash on the balance sheets of corporate America and dry powder in the private equity world, family owned businesses and PE management teams are likely to sell en masse before the tax increases solidify.

Yet, according to PricewaterhouseCoopers (PwC), deal volume was down for the first half of 2010. For the first half of 2010, lenders acted much more cautiously, making many wonder if credit is available. The current Private Equity overhang, $850 billion, represents 54% of all capital committed between 2004 and 2009, which leads us to believe that capital is indeed available and waiting to be deployed. There is plenty of cash for PE to make deals happen even with potential time bombs created by law makers. While the mega deals may garner the most press, the median deal size is $107 million, demonstrating that smaller and mid-market deals actually dominate the landscape and provide tremendous opportunities for their buyers.

Now is a great time to execute so-called mergers of productivity to capture scale and cost savings. Industrial products is one of the many industries ripe for divestiture. As reported yesterday, aerospace is also ripe for consolidation as the major players’ growth is stifled by fragmented suppliers who are constrained by size and investment capabilities. He who rolls up the industry reaps the bounty.

The mega deals, the deals above $2.5 billion, are back in vogue. And while they provide private equity firm service providers, like us, with good work, the real game is still in the smaller deals, particularly those less than $250 million. Small deals, those under $50 million, are the net winner in terms of volume, but the volume of $50-$250 million deals is catching up and is almost even with the number of <$50million. According to research from Pitchbook, these smaller deals account for a combined 72% to 88% of the market in any given year as measured by the quantity of deals.

If you consider the actual cost of due diligence, the resource outlay is fairly similar whether the purchase is $175 million or $25 million. Now, what you actually pay for transactions services won’t be, but as a provider, the dirty little secret is, it is just as intensive either way. Which is why smaller companies, those under $100 million annual revenue, have such difficulty finding skilled transaction vendors willing to work with them. Smaller corporate clients may have challenges identifying appropriate service providers in order to dress up for sale.

This is good news for private equity firms on the hunt.

Family enterprises are looking particularly vulnerable to the impending tax law changes. Now is a great time to pull together a dominant industry position. Happy hunting.

PWC Transaction Services reports an increase in small to medium corporate and private equity deals through the first half of 2010 with expected increase through the rest of 2010.

The curse of too much cash and pending tax increases?

2005 and 2006 saw huge influx of cash to Private Equity coffers, now those reserves are due to be returned if not invested. That coupled with Corporate America hoarding cash, some are predicting a boom in the small-medium sized acquisitons.

Given the current state of world affairs, those of us who are more conservative are pushing the productivity acquisition. It isn’t worth spending cash to be done with cash, it is important that we spend to make gains within our existing lines of business and our related lines. In some cases, the acquisitions make sense to acquire quiet intellectual property -IP that’s been laying dormant due to the downturn.

The Median deal size in the first half (of 2010) was $107 Million, indicating that smaller, middle market deals have become the new ‘normal.’

Industrial products and technology may have the most to gain. PWC promotes the idea that private equity shops are ready to pick up divestitures. I am pushing harder on corporate acquisitions to solidify operations and to transition dying/sick product lines.
Sectors ripe for consolidation:

Construction – the real estate boom/bust has left some weak players with decent physical assets limping around. Some companies can be acquired for less than the cost of buying their equipment at retail. Look for international acquirers planning US expansion and those planning international expansion, but needing equipment. Due to interesting trade agreements, it can be less expensive to acquire a company in order to get the assets out of the US than it is to buy the assets directly.

Energy – Commodities, commodities, commodities.

“Equipment and service companies will expand their product and geographic footprint through transactions.” -PWC

Couldn’t agree more. The Gulf spill only enhances the opportunities in this sector. What gets attention gets cash.

Moving objects – Automotive consolidation and Aerospace/Defense are poised to enjoy decent middle market transactions. For A&D a successful transition to private enterprise and away from defense budgets will mean a change in thought-leadership.

The Wall Street Journal reports that several Private Equity groups are staring down the barrel of their capital commitment periods. 2007 and 2008 were record fund-raising periods, and now the funds who benefited are in a push to use those funds or return them to the investors. Talk about perverse incentives. Indeed the story on the street is that purchases will be overpriced in order to absorb the powder….

Let’s have a closer look at the numbers.

According to Preqin, an alternative investment research firm, over $51 billion must be invested by the end of 2011, with an additional $158 billion to be invested by 2013. By point of comparison, the total amount invested by Private Equity firms in 2009 was: $48 billion.

It seems like an unreal amount must be absorbed, and yet, dig a little deeper and you’ll learn that the median annual equity placed since 2004 is $168 billion. If you consider that proportion of equity represents roughly double what it did just a few years ago, 30-35% rather than 15%, the powder can be absorbed without resorting to overpricing.

There is plenty of room for sane deals and new funds.

Recession proof your business this summer by unlocking your cash reserves. Start shopping! Now really is an excellent time to buy. Average and mediocre private equity firms are on the sidelines because they depend on the fast food of capital, cheap debt. Banks are skittish and recent deals are not unlocking their value at quite the rate some investors would like. Even the Financial Times mentioned that a number of PE firms would be returning capital to investors (6/30/08 FT) because they cannot meet return targets.

This creates the perfect opportunity for corporate investors to snap up some delightful complements. We are seeing interest in corporate entities rounding out their client interaction portfolio which is to say, making their communities tighter.

For the local Dental Clinics this means purchasing the local community user group that has 10,000 active and 20,000 moderately active users (interact once-a-month). While it is not unusual to see vertical integration, what is different now is the flavor of that integration. These are independent users bound only by an interest in being terrified by Dentists. The Dental Clinics get the obvious benefits of “listening in on user conversations” to enhance, reposition their products and advertising at cost, but the abstract benefit of expansion is much more real with a user group to lead the way.

Given that a number of these users are not as true local as would be necessary for a Dental Practice, the Clinics are using this (super cheap!) acquisition to open additional not-currently-local markets. These additional clinics will open in early 2009 and already have 2 month waiting lists in 4 of the 5 new markets. The doors will open cash flow positive. Not a bad gig if you can get it.

So open your FCF to acquisitions that can bring you closer to your best customers. Snuggle right up to them. The deals aren’t cheap in most markets but the crazy auction format has ceded to a more reasonable due diligence style.

I like deals that complement your core offering. If your customer wants it anyway, why not benefit from providing it? Enjoy shopping through late-October.