Mergers, Acquisitions and the Credit Crunch – 'Show me the Money'
Dermot Grant, managing director of Origin Corporate Finance examines the changing role and challenges facing the corporate finance advisor. - Sunday Business Post 15th Feb 2009

Most practitioners of corporate finance are nervously and carefully watching their deal flow and trying to predict where the deals are going to come from in the next year or so.  Is it a case of the same number of deals of less value or less deals for less value?

While Irish M&A deal numbers in 2008 held up on 2007, the deal values were down by 70 percent. The steepest drop was the last quarter of 2008.

Without stating the obvious, driving this down is a reluctance to sell whilst values are low and difficulties raising funding particularly leveraged finance.  The flip side of this is that there is great value out there for acquisitive individuals and companies with cash.

Distressed companies are forced to sell because of financial concerns or groups wish to divest of their subsidiaries to provide much needed cash. There is also an added air of conflict in some transactions.

I expect that management buy-out activity which is often dependant upon leveraged funding will slow down or the funding search will concentrate on equity investors.

At Origin Corporate Finance we have seen positive, tentative signs of private and corporate investors with cash coming out the woodwork and looking for opportunities.  During the boom an advisor who specialised in trading transactions had to compete when seeking funding with all the perceived wonderful property opportunities that existed here and abroad. It is yet to be seen whether the obsession with property investment will be replaced with a real appetite for investment in, or the acquisition of, trading, technology and service businesses. 

That of course leads us on to the banks and their ability to change a mindset that preferred property as security. While imaginative bank lending for leverage acquisition through debtor financing,  senior debt or mezzanine was available in recent years, trying to get acceptance of assets such as intellectual property as security was difficult and more often the response was 'you need more equity'. It would be interesting to now compare bank bad debt statistics on development property with non property backed business development / acquisition finance.

Everyone agrees that to get things moving the banks have to start lending. How more difficult is it for a bank to lend for business development, secured on future cash flows,  as compared with   a property backed loan at low loan to value, when it is very difficult to say where property values will actually end up. Because bankers are not venture capitalists, I would say it will be very unlikely that there will be a serious change of mindset.
In order for banking to seriously shift a greater portion of lending away from property backed security to other intangible business asset development loans, they will require support from government guarantees or structured equity/loan products with investors partnering with banks to develop a hybrid investment product perhaps supported by state agencies. The product could have either an equal shared risk or different risk depending on the return of each contributor. While this type of approach is not exactly a new invention, a clearly defined and branded business investment/loan product, with clear criteria and devoid of red tape would hopefully speed up the funding to business.

As for the corporate finance profession, I see us:

1. Helping companies or groups of companies to re-structure and organise their business to minimise losses and maximise profit and release cash where necessary by the disposal of parts or all of the business.  A Corporate Finance adviser working hand-in-hand with the business in this situation can mean maximum value or at least survival.
2. Acting for cash rich investors in acquiring and investing in trading and technology enterprises. 
3. Hopefully working with banks and state agencies to develop new and imaginative investment products for business.

Undoubtedly things have changed from the heady leverage/MBO deals of the 90's or the private equity / listing deals in the earlier to mid part of this decade,  to where we are today with th focus shifting to merger consolidation and rescue work. Let's hope the corporate finance professionals are adaptable and adjust to the new challenges.