Photograph by Getty Images
By Bob Rubino
May 4, 2015

You’ve spent most of your life building your business. There have been highs and lows over the years. Now, you’ve made it through the recent recession and your business is humming again.

With nearly 8,000 U.S. baby boomers turning 65 every day, it may be your time to step back and retire. Or maybe it’s time to consider making an acquisition, but you worry about the impact a deal will have on employees and customers whom you care deeply about.

You’re not alone. ​

An improving economy and the retirement plans of baby boomers are two of the driving forces behind merger and acquisition activity this year, according to a recent Citizens Commercial Banking survey.

Still, we’re talking about big – often once-in-a-lifetime – decisions.

Most prospective sellers believe their company’s value will be higher in 12 months so they have real concerns about their businesses being undervalued if they make a deal today. They also worry about how a deal will affect their customers and employees.

On the other side of the table, business leaders on the ‘buy-side’ have reached a tipping point: some are firmly committed to making an acquisition this year and others have decided to sit on the sidelines for the next 12 months.

This means there will be a greater intensity by serious buyers and an acceleration in their M&A plans in the U.S. middle market this year. For those eager buyers, the concerns that sellers have about valuation and the impact on employees and customers should serve as a “call to action” for them to be proactive in addressing those fears and learning more about today’s M&A climate.

To this end, here are the 10 trends worth watching in middle-market M&A:

1. Middle market M&A is growing. A number of large cap deals done in 2014 have changed the landscape in key industries. Competitive pressures are cascading down to middle-market players who continue to look for accelerated growth. Our survey found that 57% of companies with $100 million to $2 billion in revenue are currently involved in, or are actively seeking, acquisitions.

2. Unsolicited offers are increasing. Many growth-hungry, cash-rich buyers are taking the direct route with targets that match their criteria, rather than waiting for an auction process to begin. Prospective sellers need to be prepared and informed. A trusted advisor can help you develop a strategy and assess whether the offer fits … or not. Expect more unsolicited activity from sponsors, who are experiencing intense competition from the abundance of capital available and looking to avoid expensive auctions, making proprietary deals most attractive.

3. Sponsors are getting more flexible. New options are possible today that were rarely considered by financial sponsors in years past. Private equity investors are reaching out to smaller companies, and firms that focus on companies in the range of $5 million to $30 million in EBITDA are finding it easier to raise institutional capital.

4. Activism – by any name – is a force to be reckoned with. Activists – now trying to rebrand as constructivists – are focused on influencing corporate strategy in broad and diverse ways rather than simply driving short-term return on investment. Today, they are as likely to drive divestiture of assets they perceive as non-core as they are to get behind aggressive acquisitions to accelerate growth. What’s more, they are moving down from large-cap to middle-market opportunities.

5. Deal multiples are expanding. Buyers are motivated when it comes to strategic fits that offer proven performance. Buyers are more willing to consider valuations that might have been considered “overheated” last year.

6. The market’s good for cross-border deals. The historically strong dollar is making for good M&A shopping abroad – even though it puts a damper on exports. Look for last year’s double-digit growth in cross-border deal volume to continue as U.S. companies reach for good values to power growth, scale, intellectual capital or natural resources.

7. Healthcare heats up. In M&A, as well as equity markets, healthcare has been – and likely will continue to be – the year’s headliner. Healthcare deals are buoyed by massive sector changes: big pharma chasing growth as anchor drugs go generic, the hunt for fast-moving life sciences and healthcare IT innovation, and hospital consolidation in the wake of the Affordable Care Act and declining reimbursements.

8. Energy and industrials M&A transactions will grow. With plummeting oil prices and slowing production growth, energy players with limited geographic and asset diversity may be driven to consolidate or sell, and many larger well-capitalized competitors are well-positioned to acquire. While chemicals and other industrials sectors also benefit from the falling commodity prices, volatility in supply and slow global demand have prompted momentum in strategic restructurings.

9. Volatility will continue. Both equity and debt capital markets are – and will continue to be – volatile in 2015. Macro factors like energy pricing, geopolitical risks and currency swings can change loan pricing by as much as 50 to 100 basis points in as little as four to six weeks.

10. Interest rates will likely increase, but not much. While interested parties can only speculate on the timing of a Fed move, it’s clear that higher rates will affect the cost of capital, and thus deal valuations – but the increase is likely to be modest and some of its impact is already priced into both equity and long-term debt markets. Perhaps the greatest impact of the ultimate shift in interest rate policy is the urgency that it creates now, as acquirers push to issue debt and close transactions in advance of the increase.

Bob Rubino is head of corporate finance and capital markets at Citizens Bank.

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