NEW YORK, United States — Just before the madness of fashion week started, I read an interesting study by KTA Capital, an independent investment bank based in New York. The report analyses small-cap market activity for the month of January 2009 globally, as well as in selected national markets.
The first section is not a surprise: "There has been a substantial reduction in the amount of corporate finance activity internationally, not only compared to the same period last year, but also compared to December 2008," says KTA, which noted a significant drop in the number of M&A transactions. "However, several distinct trends have emerged in specific national markets," most notably, the United States.
"Despite the decrease in the number of transactions, the total US M&A volume in January 2009 was US$110 billion, greater than the January 2008 volume of US$104 billion and the December 2008 volume of US$35 billion," says KTA.
The report says that the increased volume is "driven, to a large extent, by those US industry companies that are fortunate to be in sound financial position, an influx of foreign industry participants that seek to acquire US assets 'on the cheap,' and the inflow of financial institutions' money seeking the 'bottom.'
It is often at the 'bottom' that the best opportunities for long-term value creation arise, because one of the most important factors in the success of any investment is the initial price paid. According to KTA, while the total value of activity may be up, valuations are markedly down. "The average total-enterprise-value-to-EBITDA multiple in these transactions was 7.1, compared to 8.7 in December 2008 and a staggering 24.8 in January 2008." Businesses are no longer selling at the super-inflated prices of just one year ago.
And, the report sounds on a cautionary note for would-be sellers, who might be waiting for valuations to rebound. "The capital markets have tightened significantly, even compared to December 2008 and, we believe, will continue to tighten short-term. Unfortunately, many companies that think they can sit out the downturn and raise cash in a few months and/or at higher valuations are likely to be unpleasantly surprised. The world has changed, and it is not going to be the same as what we have gotten used to in the recent 6 years or so...many of those small-cap companies in a range of industries that have historically been unprofitable and have no short-term path to profitability, will not be financable (sic), at least short-term, and may not survive beyond the next 6 months."
That being said, "the pace of M&A transactions remains fairly high overall, with consolidation going on in most industries...a good deal can be done, albeit at a substantially cheaper price than it would have attracted a year ago or even a month ago."
One bit of additional good news for the fashion industry is that the 'Consumer Discretionary' sector, which would include fashion, was the number one category for US transactions. "With mega-deals gone, most of the action is focused on the small-cap end of the market. Consumer and financial industry consolidations lead the way, with consumer goods companies generally seen as easy to understand and easy to model."
Imran Amed is Editor of The Business of Fashion.