WILL LOWER MIDDLE-MARKET DEALS GET HIT NEXT?
In the article below, “M&A Quarterly Report: That Sinking Feeling,” Demitri Diakantonis examines in detail what is likely to happen in the lower middle-market, loosely defined as those valued under $100 million. According to Mr. Diakantonis, “The M&A pipeline below $100 million has been a pleasant surprise since credit froze up, but the chill may be spreading.”

Please feel free to forward this newsletter to friends, colleagues and networking contacts. (Go to www.focusbankers.com for newsletter archives.)

Active FOCUS Deals

Operating nationally and internationally, FOCUS is currently working with buy- and sell-side corporate clients, private equity groups, holding companies and late stage venture capital firms in the following areas:

• Aerospace
• Automotive
• Building Products
• Business Process Outsourcing
• Business Services
• Call Center
• Construction
• Diagnostics
• Distribution
• Education and Human Capital Development
• Energy, Oil and Gas
• Food and Beverage
• Government Contracting
• Healthcare
• Information Technology Services and Software
• International
• Manufacturing
• Media and Publishing
• Medical Devices and Equipment
• Metals and Mining
• Payment Systems
• Professional Services
• Retail
• RFID Technology
• Satellite Communications
• Security Systems and Services
• Supply Chain Management
• Systems Integration
• Technology
• Telecomm and Wireless
• Transportation

We have executed dozens of transactions in a range of market segments, but the same fundamentals apply across all of them. Our on-going transaction process provides us with up-to-the-minute market knowledge in these sectors that may be of corporate development interest to you.

Inquiries should be addressed via e-mail to info@focusbankers.com, by telephone to 202-470-1973 or by fax to 202-785-9413.

C.M. Paula Has Acquired GeoCentral

FOCUS LLC initiated this transaction, assisted in the negotiations and acted as financial advisor to GeoCentral, a distributor and wholesaler of a wide array of gift items, including nature-related products, educational kits, impulse items and jewelry. C.M. Paula, a privately-held giftware company, operates several primary consumer product businesses – social expression gifts, pop-up greeting cards, and sports licensing gift products. With its strong brand and unique products, GeoCentral represents an excellent diversification opportunity for C.M. Paula. The firm expects to aggressively grow GeoCentral’s distribution and product selections. Read more...

FOCUS Debuts New Information Technology Group

New Group Includes Seven Former IT Industry CEOs

Over the past several years, the most active industries for FOCUS clients have been in information technology. To better serve clients in this segment, FOCUS has formally organized some of its most experienced investment bankers into a specialized Information Technology Group focusing on software, IT services and transaction processing companies.

The FOCUS Information Technology Industry team is led by George Shea from the firm’s Southeast Region. Other team members include Jim Harper, also of the Southeast Region; Brad Balow, Marshall Graham and Manan Shah of the MidAtlantic Region; Michael Zook of the Midwest Region and John Bradshaw, Bob Netter, Laura Russell-Jones and John Simpson of the Western Region. This national team is complemented by Mark Braunstein, Dick Cook and Don Hollis; FOCUS Senior Advisors who as CEOs built and sold leading edge technology companies prior to joining FOCUS. The group includes seven former IT industry CEOs with extensive transaction experience.

“The formation of this industry team, focusing on the information technology industry, is a natural outgrowth of our past success providing merger, acquisition and capital formation services to the information technology industry.” said George Shea, Managing Partner of the group. “ T he largest segment of FOCUS’ business originated during the past three years came from clients in this industry, and we continue to execute an increasing number of IT transactions, including cross boarder deals, in today’s market.”

Further details can be found on the FOCUS Information Technology Group web page, www.focusbankers.com/technology, which features comments from clients, recent client engagements and descriptions of the services provided. For more information, contact George Shea at George.Shea@focusbankers.com or by telephone at 404.491.1757.

M&A Quarterly Report: That Sinking Feeling

The M&A pipeline below $100 million has been a pleasant surprise since credit froze up, but the chill may be spreading

By Demitri Diakantonis, Dealscape, TheDeal.com

Lower middle-market deals, loosely defined as those valued under $100 million, have not been affected by the credit crisis as severely as larger deals -- particularly megadeals, which have essentially evaporated. But with capital markets soft, many believe that segment of that market could get hit next.

According to data provider Dealogic, 508 such strategic deals, worth more than $12.36 billion, were announced in the U.S. in the first quarter. This was a significant increase over the same quarter in 2007, when 359 deals were announced for a value of greater than $10.2 billion.

That's the good news. The bad news is that the number of lower middle-market deals appears to have peaked in the fourth quarter of 2007, when 547 transactions were announced with a total value of more than $12.4 billion, according to Dealogic.

Andrew Greenberg, CEO of GF Data Resources LLC, a research firm that provides data on middle-market dealmaking, wrote at the end of last year that "we expect our next [quarterly] report to show that smaller deals did get pulled into the downdraft to a greater extent in the first months of 2008."

Greenberg's prediction is reinforced by purchase price multiples for companies with Ebitda of $50 million. In the first quarter, this multiple averaged 8.9, compared with 9.3 at the peak of 2007, according to Standard & Poor's Leveraged Commentary & Data. S&P data suggests that over the past 12 months total enterprise value of adjusted Ebitda fell from 6.5 times in the first half of 2007 to 6 times in the second. Deals in the $25 million to $50 million and $50 million to $100 million segments fell to 6 times from averages of 6.9 and 7 times.

"In the next few months, we expect the market segment we cover to continue to be hit by economic uncertainty, tighter credit and weak performance in some sectors," Greenberg says.

Due to their smaller sizes, lower middle-market deals are easier to finance, usually requiring only three to five lenders. Upper middle-market deals -- those in the $500 million and higher range -- are unlikely to get done without at least five lenders, say practitioners. Lower middle-market deals rarely, if ever, involve complex debt transactions with multiple levels of securitization.

David Hoffman, a managing partner for New York private equity firm Charterhouse Group Inc., also believes there's been a slowdown in middle-market M&A. "There is still a carryover for sale mandates which were awarded at the end of 2007," he notes. Hoffman expects "new opportunities" for his firm to be down more than 20 percent this year but emphasized "for us, it's the quality and not the quantity of deals that matters."

Not everyone is looking at reduced M&A activity. "Amazingly, we are not seeing any significant slowdown in transaction activity so far this year," says Randy Schwimmer, head of capital markets for New York-based Churchill Financial Holdings LLC. "M&A volume is obviously off for larger caps, and even larger midcaps, but the [lower-middle] market continues to see dealflow." The reason for this is that "smaller deals are easier to finance. Whatever slowdown may be coming hasn't been reflected in our pipeline, which is pretty robust."

Another observer says it's too early to tell where the lower-middle markets are headed. William Winterer, a managing partner for Parthenon Capital LLC, says his firm was still able to finance its last few transactions even though financing has been "difficult and expensive."

Winterer believes the situation could go either way. "If the economy ends up in a full-blown corporate earnings recession and default rates increase materially, the lending markets will likely get worse," he says. "If the overall economy stabilizes and corporate earnings remain decent, the middle-market lending environment should improve modestly."

Other executives, such as Barrington Associates' CEO Michael Rosenberg, remain upbeat about 2008. "Although it may be contrarian opinion, we are still very optimistic," he says. "We see robust deal activity. Buyers are still out there, and transactions are still getting done, as both strategic and financial acquirers are still interested in pursuing high-quality middle-market companies."

Reprinted with permission from the April 18, 2008 edition of The Deal.

Jonathan Wilfong is Named New FOCUS Southeast Regional Managing Partner

With almost 40 years of M&A experience, Jonathan Wilfong will lead the FOCUS Southeast regional office of more than 10 investment bankers. Additionally, he will serve as team leader for the newly established FOCUS energy group.
 “Jonathan’s proven experience in M&A, business development and capital formation will serve the firm well in growing the FOCUS Southeast region,” said Doug Rodgers, Managing Partner of FOCUS. “Jonathan is the right banker to lead the firm’s Atlanta office and develop the energy group to help our mid-market clients realize their financial goals.”

About Jonathan Wilfong