The first half of 2009 witnessed the trough of a powerful recession that cut a wide swath through some of our nation's largest industries. Housing, autos, financial services, travel, food service, luxury goods, apparel, and commercial real estate all were affected significantly by the continued undertow of declining demand. The human toll from this recession is most evident in our country's staggering unemployment numbers. It will take years before our payrolls return to the peak levels seen in 2007.

As this article is written, the economy is recovering. The natural economic cycle in conjunction with global monetary and fiscal stimulus have joined forces to re-inflate demand. Companies are tepidly hiring again; the stock market has recovered from its lows; and consumer confidence is improving. However, large questions remain: Will the US government and the Federal Reserve be able to execute an exit plan from its oversized role in final demand? Will the US be able to stop its slide in global economic market share? How significant will the negative impact of high, chronic unemployment be on economic growth?

The merger and acquisition (M&A) market in 2009 reflected the economic pattern described here. The first half of the year witnessed a slide in M&A activity to levels not seen in years. The second half of the year saw improvement, but it was spotty (with paper and packaging actually being a bright spot). However, leveraged buyout M&A activity remained moribound.

Figure 1 demonstrates the significant drop in global merger and acquisition activity across all industries.

A severe contraction in M&A activity is not at all surprising given the head-winds virtually all companies faced in 2008 and 2009: drops in demand, pressure on profits, lower public market valuations, and scarcity of credit. No wonder CEOs took a low profile in the M&A game.

Even more startling is the drop in leveraged buyout activity depicted in Figure 2.

Leveraged buyouts are very dependent on the availability of high risk credit. That type of credit was almost non-existent in the first half of 2009 but did show some signs of re-emergence in the second half. However, it will probably take a new generation of credit providers to emerge before the levels of 2007 are approached again.

The packaging industry was not immune to the economic challenges seen in 2009. Several of the industry's titans saw their stock prices and valuations tumble in the first half of the year. However, with the faltering economy came lower input costs and a commensurate boost to operating margins. In addition, packaging producers took a disciplined approach to mill and plant operating rates. This discipline, in conjunction with reasonable levels of end market demand, resulted in improvements in profits and stock valuations in the second half of 2009.

The relative strength of the packaging industry can be seen in the M&A statistics. Figure 3 shows packaging M&A volume picked up noticeably in the second half of the year.

The totals were supported by such noteworthy transactions as the purchase of Alcan's pharmaceutical packaging business by Amcor, the purchase of Alcan's flexible packaging business by Bemis, and the purchase of Specialized Packaging Group by PaperWorks Industries (Mesirow advised Specialized Packaging Group in this transaction). While not affecting M&A totals, it also should be noted that 2009 witnessed several significant paper and packaging bankruptcies: Smurfit-Stone, Pliant, AbitibiBowater, Caraustar, and Fraser Papers, for example.

Not surprisingly, packaging deal volume could not escape the slowdown in private equity-led activity. In a typical year, private equity transactions account for roughly half of all packaging deals. In 2009, only 25% of the deals were backed by private equity groups, and only one exceeded $500 million in value.

The combination of significant declines in share prices, public market valuations, and reduced M&A volume led to a drop in purchase price multiples. Figure 4 compares valuation multiples for both strategic and financial buyers over the past few years.

Outlook for 2010

Mesirow Financial is expecting improvement in the merger and acquisition marketplace in 2010. Much of the improvement will be driven by strategic buyers whose confidence levels have benefited from the following:

• Increased stock prices (A Mesirow index of paper and packaging market capitalizations has increased by 230% from the lows seen in March 2009.)
• Increased levels of corporate liquidity and access to the debt markets
• An improving economy (Mesirow's chief economist is calling for a 3.1% increase in GDP in 2010.)

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