As much as we talk about private equity playing a key role in middle-market merger and acquisition (M&A) activity, it is important to remember that strategic players are also a key buying group driving activity in this sector. Both groups bring differing strategies and goals to their acquisition programs but they ultimately want the same thing: To find companies in the middle market that are profitable, growing, and “buyer ready.”
Recently Firmex and Mergermarket combined to survey corporate leaders (from now on referred to as strategic buyers) regarding their expectations for M&A activity in U.S. and Canada going forward. Their report, entitled “Mid-Market: The Crux of North American M&A,” is a great examination of how leaders of these strategic players in North America are viewing the M&A environment they face.
Firmex is a virtual data room (VDR) supplier. VDRs are now used in most M&A transactions to allow all parties – sellers, buyers, intermediaries, attorneys, etc. – to share and review critical deal-related documents in a secure environment. Mergermarket is an independent M&A intelligence research organization used by the world's leading financial institutions to originate deals. It provides proprietary intelligence on potential deal flow, buyer mandates, and valuations.
This is how they summarize their findings in the report:
“North American mid-market activity is on an upswing. For both the US and Canada, expectations are for an increase in overall mid-market M&A activity over the next 12 months as eighty-eight percent of respondents believe that the number of deals will increase for each of the two countries. Only 12% of respondents believe that dealmaking will remain the same.”
You can see these results visually in the following chart:
Survey results like this from leading buyers of middle market companies are indicative of the current sellers market we are in. Keep in mind that the definition of the middle market can vary dramatically depending on the source. In general most middle market deals are defined as those valued below $500 million, and the lower middle-market is usually comprised of deals valued below $100 million. In reality these ranges encompass the lion’s share of all transactions in a given year.
As we have discussed in the past, one of the factors making strategic players active acquirers in the current sellers market is the estimated $2 trillion sitting on corporate balance sheets waiting to be used, largely for acquisition initiatives. Although this is indeed a driving force behind current M&A activity, according to Firmex/Mergermarket, the middle market has special appeal:
“The popularity and attractiveness of mid-market firms as targets is one of the reasons behind this optimistic view of future activity, as the potential for advancement in many of these firms is spurred by technological innovation. As one partner at a private equity firm says, ‘Midsized and small businesseshave the niche and innovative business ideas that will lead to significant growth.’ He adds that the US’s and Canada’s economic recovery gives companies an added boost because it gives them ‘the much needed confidence to undertake M&A.’”
All too often owners of lower middle-market companies lose focus on what really motivates strategic buyers and what makes these entrepreneurial-run companies so attractive to larger strategic players. The Firmex/Mergermarket survey clearly outlines the fact that small businesses have usually carved out a profitable niche and are able to innovate much more quickly than much larger industry players. This makes them very attractive.
And the proof is in the data:
“Corporate acquirers anxious for growth are looking to small companies as a way to offset the hum-drum pace of the economy, which could mean more competition for private equity firms at the lower end of the market.
More than 70% of the acquisitions made by the 25 most active corporate acquirers in the first half [of 2014] – an industry-diverse list that includes insurer Arthur J. Gallagher & Co., technology giant Google Inc. and real estate brokerage Realogy Holdings Corp. – were deals valued at less than $50 million, according to data from research firm Sutton Place Strategies LLC. Combined, those 25 companies did 99 such deals.”
This data is probably shocking to most readers. These huge industry leaders, through the first half of 2014 alone, made 99 acquisitions valued BELOW $50 million, which accounted for 70% of their acquisition activity!
This trend is expected to continue in 2015, as reflected in the Firmex/Mergermarket report:
As you can see, the largest majority of deals closed in the next 12 months, according to these strategic leaders, will be valued below $250 million. If they had broken this survey down into smaller valuations, I would bet that a solid core would have been valued below $100 million.
Attendees at Generational Equity M&A seminars are usually quite surprised when we present findings that are similar to the Firmex/Mergermarket research. Again, far too often lower middle-market business owners get so focused on the day-to-day operations of their businesses that they completely forget how attractive they could be to specific buyer types.
Generational Equity is a sell-side M&A advisory firm that specializes in the lower middle-market. As you can see from the latest Thomson M&A advisory ranking tables, our sweet spot is working with companies valued below $100 million:
Our services have been used to help owners of lower middle-market companies just like you achieve their financial goals either with an outright sale of 100% of the company, a partial sale to an investor group, or something in between. We can help structure a deal that meets your financial needs. We never work for buyers; we only work for sellers, and we are dedicated to helping our clients close transactions with optimal buyers with deal structures that protect their families’ financial legacies while maintaining the integrity of the business in the long term.
Special thanks to both Firmex and Mergermarket for capturing the M&A expectations of strategic buyers in North America!
Carl Doerksen is the Director of Corporate Development at Generational Equity.
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