Home >> Resources >> Blogs >> Market Insights >> Cautious Optimism for Middle Market M&A as Decade Comes to a Close
15 Dec |
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| During the second half of 2009, deal activity remained sluggish but is now beginning to show signs of recovery according to MidCap Advisors. Lower middle market deals continue to get done, but the types of transactions completed, and the way deals are structured and financed, has changed significantly.
The new deal enviroment is defined by continuing economic uncertainty, margin erosion, scarcity of capital and lower risk tolerance on the part of buyers. Despite that, as 2009 comes to a close, we remain cautiously optimistic about middle market mergers and acquisitions as the decade comes to an end. "While the level of deal activity probably will not return to pre-recession levels within the next few years, we believe that increased market confidence, more available credit and increased cash reserves will provide some interesting opportunities for owners who are interested in exiting their companies in 2010" says Richard Jackim, a Managing Director at MidCap Advisors. The following factors should have a positive impact on over all M&A activity.1. Increased Market Confidence: Market confidence, starting with consumer confidence and extending to confidence in the credit markets and confidence on the part of investors, is the primary driver of M&A activity. The Dow Jones industrial average, a good proxy for market confidence, has tracked the M&A market for more than a decade. With the Dow reaching a 14-month high in December, we belielve that higher deal activity should follow. 2. Increased Cash Reserves: Shaken by the 2008-2009 financial crisis, companies are now holding on to more cash than at any time in the past 40 years according to a November 2009 Wall Street Journal article. Fortune 1000 companies have more than $1.8 trillion in cash on hand, an increase of $271 billion over last year which signals that strategic buyers may become more aggresive buyers in 2010. 3. More Available Credit: Credit has been the primary limiting factor on deal activity over the past year. During the second half of 2009 there was a slight increase in available credit which spurred some deals. However, for the most part, continued market uncertainty has left banks hesitant to lend. In 2010, we believe the new deal landscape will be defined by the following characteristics: 1. More Focus on Smaller Deals: We will probably see fewer of the mega deals of previous years and more focus on smaller transactions. In fact, only 145 completed deals broke the $1 billion mark over the past year, down by 63% compared to 2008 and down by 76% from 2007. 2. More Focus on Due Diligence: Increasingly buyers are conducting more rigorous due diligence and strategic buyers want to make certain of the strategic fit before embarking upon an acquisition. 3. More Focus on Non-Traditional Deal Structures: Buyers will increasingly need to use seller financing (including seller notes, earnouts and consulting agreements) to close deals and bridge the valuation gap between what a buyer and the seller feel a company is worth. |
