Middle Market M&A Muddles On

07.15.2011 - Mergers & Acquisitions

Our contention remains that all is not well in the M&A market despite the headlines mega transactions garner in the media.  We recently read the June 2001 Monthly M&A Insider report published by Mergermarket which reinforced our thinking.  In particular, the report reflected a pronounced decline in transactions globally as well as in North America for the first five months of 2011 as compared to the second half of 2010.

For the month of May they reported that there were 233 announced transactions with an aggregate value of $71.9 billion in North America.  This compares to 302 announced transactions with an aggregate value of $93.4 billion in April.  The report surmises that perhaps “a historically quiet summer period could be underway” though we have never thought of May as being part of summer.

In May an article in PE Digest caught our attention as it reaffirmed what we have been saying for the past 18 months regarding the weak state of the M&A market for smaller companies.  It was especially noteworthy for those of us who primarily advise privately owned middle market companies valued at less than $50 million.

The article was written by Scott Eisenberg, Managing Partner and Don Luciani, Partner; of Amherst Partners.  It was based upon a study of transactions completed in 2010 versus 2009.  As one would expect coming out of the depths of the recession, both the volume and value of the transactions increased appreciably year over year.

However, the authors noted, “What is particularly interesting is that there is a clear demarcation in the rate of growth of activity at the $50 million transaction size.”  They go on to say, “The growth rate for transactions under $50 million is significantly lower than the rest of the market with the under $10 million segment of the market actually declining on a year over year basis.”  Personally, I would characterize it as “dramatically” as opposed to “significantly.”

It further serves to demonstrate that despite the significant increase in the risk appetite of commercial banks in the past 12 months, along with massive amount of liquidity available today for such transactions, it has failed to propel M&A activity in this sector of the market.

Given all of the headwinds the economy faces it is likely to remain weak for a considerable period of time.  Consequently, M&A activity and valuations will continue to remain soft for the foreseeable future.  Therefore, it is imperative for owners of companies in this sector of the market to prepare well in advance of a sale to maximize the value and improve the chances of consummating a sale.  This should be a call to action to address any weaknesses identified using our Value Drivers that Maximize Company Value paper.