Middle Market Mergers & Acquisitions Alive and Vibrant

 

Historically, cycles in M&A have lasted anywhere from 2-5 years. According to the latest industry data, 2015 marks the second consecutive year of record-setting M&A activity. Therefore, we are either nearing or just past the midpoint of the latest cycle.

Coupled with the fact that we’ve been in a bull market for more than six years, M&A experts are cautioning business owners to pay attention to the conditions of the current marketplace, as today’s premium prices will not last indefinitely.

Middle-Market Business Owners Are Waiting To Sell…Why?

A shortage in supply of middle-market companies inclined to sell is producing highly desirable multiples and premium prices for sizable, average to above-average performing businesses.

The latest research shows that the proportion of activity in the middle market is down considerably, while multi-billion dollar mega deals are accounting for a significant percentage of total 2015 deal value. In 2014, middle-market deals composed nearly 40 percent of all activity. Over the past four quarters of 2015, that percentage is hovering closer to 25 percent.1

Multiples at Record Highs

With the exception of companies in the $10-25 million range, multiples in 2015 were the highest they have been since GF Data started collecting data in 2003.2

According to CMF Associates Fall 2015 findings3, 32 percent of private equity funds say they’ve seen 9X multiples (or higher) being offered to sellers in 2015, compared to only 19 percent seeing the same in 2014.

Experts on the M&A cycle say that a shortage of middle-market sellers can also lead to a better chance of a transaction closing in a favorable time frame, since investors are looking to put their liquid capital to work in the market immediately.

Money is Cheap

There is approximately $3 trillion available in the U.S. today to either buy, or invest in successful, middle-market companies.4

Research firm Preqin reported earlier this year that private equity funds are sitting on $1.2 trillion in dry powder, while 85 non-financial corporations are holding onto $1.8 trillion.

So what does this mean, exactly? M&A industry resource Pitchbook says that financial institutions sitting on large pools of capital need to earn returns, and are being pressured to lend. The “cheap” availability of capital today is another condition priming premium for middle-market sellers. In addition, M&A experts anticipate that the Fed will raise interest rates sooner rather than later, which may spur M&A activity in the coming months.

However, it is important to note that higher multiples are partly driven by a lack of quality businesses willing to consider a transaction. As more businesses come to the table, the multiples will slowly taper back down.

Investors Have Eyes on the U.S.

Investors looking for a safe haven for both their capital and business growth have eyes on the U.S. Per the November MergerMarket5 report, “North America continued to dominate global deal making, accounting for 58.5 percent of M&A with 403 transactions worth $194 billion, up 36.7 percent from October 2014’s 532 transactions worth $141.9 billion.”

While the U.S. economy has somewhat stabilized, the global economy is on the brink of crisis, say experts at Kratos Capital. Western and Eastern Europe are on the downside of the trend, and while China experienced dramatic growth it is now in a period of retrenchment. These and several other global economic factors have made the U.S. the optimal location to grow a business and participate in the current M&A cycle.

Expectations for the New Year

By all accounts, 2015 was a record year for M&A, reaching approximately $1.7 trillion total1, despite lower activity levels in the middle-market. But given the elevation of multiples, the looming threat of raised interest rates and the amount of capital waiting on the sidelines, 2016 holds promise for discerning, sale-minded business owners.

 

Sources:
1. Pitchbook 4Q 2015 M&A Report
2. GF Data November 2015 M&A Report
3. CMF Associates Fall 2015 Research
4. Preqin, Credit Suisse US Asset Management Research, April/May 2015
5. MergerMarket November 2015 Monthly M&A Insider

VALUES, CHARACTER & COMMITMENT TO OUR CLIENTS

Our Principals have experience in a variety of strategic liquidity solutions including sales, divestitures, and mergers. We also work extensively with companies committed to expansion through acquisition. 

We are an experienced, highly effective firm specializing in managing transactions with capitalized values from $5 million to $200 million. The firm provides industry tailored investment banking expertise, in order to help owner’s, maximize the value of their investment of time, money and hard work. Each of our clients are represented by seasoned bankers, who bring a wealth of knowledge and experience. Our bankers comprise an aggregate of well over one billion dollars in completed transactions, complimented by 75 years of combined deal making on behalf of the private middle market.

We pride ourselves on creating customized solutions that result in maximizing transaction value for sellers. Each company reflects the character and characteristics that its owners bring to it. No two companies are ever alike. Their exit strategy shouldn’t be either.