Strategic Buyer and Private Equity Demand Driving Middle-Market M&A Activity

Dec 01, 2016
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Market Updates

Please be aware: More recent data has been published since the time of this post. To see current market trends, check out the most recent issues of Market Updates.

Market data indicates that U.S. merger and acquisition deal activity decreased in September, going down 5.4% with 1 ,005 announcements compared to 1 ,062 in August. However, aggregate M&A spending increased. In September, 28.3% more was spent on deals compared to August.

Over the past three months, the sectors that have seen the biggest declines in M&A deal volume, relative to the some three-month period one year ago, have been: Technology Services (439 vs. 575), Commercial Services (452 vs. 554), Health Services (158 vs. 225), Finance (356 vs. 41 8), and Distribution Services ( 1 4 9 vs. 1 85). Fourteen of the 21 sectors tracked by FactSet Mergerstot posted negative relative losses in deal flow over the last three months compared to the same three months one year prior, for a combined loss of 534 deals.

While an important component to consider, advisors ranked the presidential election third in a list of four factors that could be impacting the current marketplace. Lack of quality sell-side opportunities (49% Main Street, 43% lower middle market) led among pivotal market factors, followed distantly by low interest rates (30%, 28%), the presidential election (1 4%, 1 7%), and the lagging stock market (8%, 1 2%)..

"We see close similarity in how both Main Street and lower middle-market advisors ranked these economic factors," said Craig Everett, Ph.D., Director of Pepperdine Private Capital Markets Project. "Even though these sectors have different experiences in terms of deal volume and seller leverage, they're still reporting a consistent view on larger market trend issues."

Looking back year over year, advisors saw an increase in new clients across most sectors, with the strongest growth among businesses valued at $5MM-$50MM. In the same sector, however, optimism for new client engagements is modest with a mean of 3.3.

The lower middle market appears to be negatively impacted by a decline in quality opportunities. Private equity groups and existing companies are seeking well-prepared companies to purchase; however, many sellers are finding that many companies for sole in this segment of the market are lacking in timely accounting records, or their owners simply have unreasonable expectations. Often, business owners have very strong emotional ties to their business (and rightfully so), but prevailing market conditions ultimately dictate whether or not their expectations are attainable..

While market conditions have remained relatively stable, since we've been enjoying the second-longest bull run (second to the run of the 1990s), we can only assume that eventually market conditions will shift. However, there is no clear indication that a shift is imminent.

GF Data®, whose database consists solely of private eguity buyers, reports middle- market M&A activity in the third quarter seemed to settle further into the glide path it has observed over the past couple of years, showing slow, steady increase in completed deal volume, record valuations, and staunch debt support.

GF Data reports that completed deal volume is slightly down compared to the first nine months of 2015, from 167 to 148. While this could seem to point toward a downturn, it is not necessarily a harbinger of decline. It's plausible to partially attribute the lower number to late reporting.

At Wipfli Corporate Finance Advisors (WCF), we have seen continued strong demand by private equity and strategic buyers. As previously mentioned, we are in the second longest bull market in history. It will not last forever, so if you are thinking of selling, the present remains attractive. For those companies with above overage revenues and EBITDA growth, the spread continues to be very strong. In addition, if you ore thinking of going to market, accurate financial reporting will help in the process from a pricing standpoint as well as in your representations and warranties.

Our skilled WCF team brings not only buyer relationships, but an understanding of what various buyer groups value and evaluate and how to negotiate through obstacles that arise. Opportunities to skillfully negotiate Favorable valuations for our client sellers abound.

 


The content of this material should not be construed as a recommendation, offer to sell or solicitation of an offer to buy a particular security or investment strategy. The content of this material was obtained from sources believed to be reliable, but neither Wipfli Corporate Finance Advisors, LLC nor RKCA, Inc., warrants the accuracy or completeness of any information contained herein and provides no assurance that this information is, in fact, accurate. The information and data contained herein is for informational purposes only and is subject to change without notice. This material should not be considered, construed or followed as investment, tax, accounting or legal ad vice. Any opinions expressed in this material are those of the authors and do not necessarily reflect those of other employees of Wipfli Corporate Finance Advisors, LLC or RKCA, Inc. Investing in the financial markets involves the risk of loss. Past performance is not indicative of future results.

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