Despite credit markets that are still cautious, private equity funds are at record levels and corporate balance sheets contain a significant amount of sidelined capital. This abundance of cash in search of solid acquisitions is leading some experts to believe it’s the cause of a widening bid/ask spread in the M&A market.
It makes sense that a high level of cash going after a small number of quality deals would drive up sellers’ expectations and the ultimate price of a deal. There is certainly no shortage of capital in the market to seize upon quality opportunities. Private equity firms are aggressively pursuing transactions.
In a recent white paper by Merrill DataSite, Michael Littenberg, partner at Schulte Roth & Zabel, was asked his opinion on the issue. He said, “If you’re dealing with opportunities that are being formally shopped around by investment banks, I think that’s 100 percent right.”
Littenberg goes on to say, “As a buyer, whenever possible, you want to avoid a formal bidding process…The flip side of that of course is that savvy sellers often would rather have their company shopped around to maximize price. Smaller opportunities often come to buyers directly through their network, and many niche targets are strategic to a small universe of known buyers.”