39% Rise in M&A in 2010. 89% Expect M&A Volumes to Increase.
In the last week, two key reports have been issued on the state of M&A activity in the US that show a positive trend that is set to continue.
According to a Thomson Reuters report released last week, there are some very positive signs for deal making activity for midsized US companies. M&A volumes for deals under $500 million are up 39% over the same period in 2009. Middle market M&A volumes have been picking up, with approximately $300 billion of the total $339 billion of US M&A volumes attributable to midsized companies.
This means that in the first half of this year, small to medium sized companies represented over 85% of all deals getting done in the US. Compare this to even a couple of years ago when Wall Street’s mega deals represented the majority of M&A volumes and dwarfed those of the lower and middle market. And as we discuss later in this article, this trend is likely to continue.
What is the outlook for middle market M&A volumes for the rest of 2010?
The second report was released yesterday by Intralinks and reflected on the future outlook for M&A in 2010.
89% of respondents in Intralink’s survey expect M&A activity to increase in North America over the next twelve months and 80% of respondents expect the bulk of North American M&A transactions in the next twelve months to be deals under $500 million, of which 44% are expected to be deals under $250 million.
In short, deal making activity is likely to continue heating up for midsized companies. Many baby boomers had to put their plans on hold while they weathered this recession and as a result there is considerable pent up demand for both buyers to buy and business owners to sell.
1) Many potential acquirers have been waiting to buy on an uptrend or at a minimum after the market has bottomed out. Buyers are looking for value, in particular companies that are set to outperform their competitors, build market share, grow in new markets or perhaps expand along their supply chain. In other words, they are looking for value companies that represent a significant platform for growth.
Many fundamentally strong companies have had lean times in the last year or so, but buyers recognize the upside opportunity and are now targeting the middle market with considerable momentum. They have waited on the sidelines and let business owners bear the downside risks and operating losses until the risk of revenue decline has turned around. It is now time for business sellers to benefit.
2) As valuations are rising, buyers are feeling that they may miss the opportunity if they stay on the sidelines too long. While business valuations are rising, they are still lower than they were three years ago as companies have typically: i) experienced lower, volatile or inconsistent revenues; ii) had limited access to capital and had less leverage available to fund growth initiatives; and iii) had less stable earnings to support high debt payments.
In order to get a deal done, both buyers and sellers are making concessions on price, terms and deal structure and it makes sense for both sides. Buyers are paying higher prices to meet a seller’s price expectations and sellers are becoming more flexible on terms and deal structure to get a second bite of the apple in a few years time.
3) Another important factor driving M&A volume higher for privately held companies this year is a likely rise in capital gains tax next year. Tax experts predict a minimum 5% increase in capital gains tax next year. The effect on the proceeds of the sale of a $10 million company would be at least an additional $500,000 tax bill by closing a deal on 1/1/2011 compared to 12/31/2010. So, many business owners want to get moving and close a deal by the end of this year.
For those business owners who would like to earn the highest price and maximize proceeds from the sale, they need to start the sale process as soon as possible.