Home >> Resources >> Blogs >> Market Insights >> Outlook for Middle Market M&A Activity in 2011
10 Dec |
|
| M&A advisors have been busy trying to predict what middle market deal activity will look like in 2011. The truth is it is pretty tough to read the market right now. Here's why. Until the Republicans took over the House in November, most deal makers expected that an increase in capital gains rates would motivate business owners to sell their companies in 2010. While deal activity has certainly improved over the last 18 months, there was certainly no wild rush on the part of business owners to sell. Then many prognosticators predicted that the US would slip into a double-dip recession, that market liquidity would dry up again, and that sellers would be stranded at the altar. As we predicted in this blog back in August, that has not happened. Next, many deal makers were worried that the financial crisis in Europe would cause the whole Euro block to domino. Those concerns first surfaced back in May and the public markets panicked. That lasted for about a week. Then, to every one's relief, it was back to business as usual. Now that the Republicans and White House have agreed to extend the Bush tax cuts, we have a whole new set of uncertainties. Will the extended tax cuts increase the deficit? Will they cause an increase in interest rates? Will they start an inflationary cycle? Will they kill the bond market and hurt the availability of credit that is essential for a healthy recovery and M&A market? Or, will it empower U.S. consumers to spend more, build employer confidence, create jobs, and fuel a rebound in the economy and a vibrant M&A market? In MidCap's experience, very few companies are ever bought or sold solely for tax reasons. In addition, while financial conditions and economic factors can help or hinder the amount of transaction activity, they do not drive the M&A market. In the end, the market is driven by two things : a business owner's desire to create liquidity and a buyer's ability to finance the transaction. As a result, MidCap Advisors is bullish about 2011 and the years to come. The primary reason business owners exit their businesses is to create liquidity for retirement. Over the last three years there has been a 50% reduction in the number of companies that have sold, and yet their owners continue to get closer to retirement. That means that despite capital gains rates, financial conditions and economic factors, the demographics of the marketplace will naturally motivate an increasing number of business owners to consider a liquidity event in 2011 and in the years to come. On the buy-side private equity groups now have almost $500 billion in cash available to invest and U.S. companies held nearly $2 trillion in cash and short-term assets at the end of the third quarter. That, combined with a mandate from their limited partners to put that capital to work and shareholders looking for a higher return on cash balances, suggests there will be no shortage of capital to finance deals. As a result, despite the ebbs and flows of the economy and tax policy, MidCap Advisors believes the middle market will be continue to rebound in 2011 and for years to come.
|
