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Let’s Make a Deal?

Many midmarket companies are considering acquisitions. And more companies may be open to offers, if the terms are right.
COLLABORATORS Deloitte
Mergers and acquisitions trends in the midmarket

IN COLLABORATION WITH

IN COLLABORATION WITH DELOITTE

As leaders of midmarket companies increasingly focus on the top line, a substantial number are considering acquisitions as part of their growth strategy.

There are several reasons to believe that M&A activity in the midmarket will see a notable uptick this year:

  • Improved access to and liquidity of debt capital
  • A perceived increase in the supply of potential targets as family-, entrepreneur-, and private equity-owned firms look for an exit strategy
  • Strength of the U.S. market relative to international alternatives
  • Attractive multiples
  • High levels of available capital from U.S.-based private equity firms, who are sitting on more than $400 billion in “dry powder” and increasingly see midmarket firms as appealing investment opportunities
  • A recent survey of 525 midmarket executives conducted on behalf of Deloitte LLP found that while the number of companies who cited “growing by acquisition” as being a “very likely” or “likely” path to growth this year is down slightly from 2012, nonetheless it remains the second most commonly cited strategic priority for 2013, topped only by “organic growth within existing markets.” (It’s worth noting that there has been a notable spike in the number of companies who describe themselves as “not looking but would consider a deal”; see chart.)

    If an acquisition, be it domestic or global, appears to be an attractive option, companies should accept that such an undertaking will be time and capital intensive. But acquisitions can be a great way for companies to expand rapidly, achieve economies of scale, and acquire new customers, products, or enabling technologies. Acquiring a company in an emerging country, while far from simple, is now easier than in previous cycles because leading practices and precedents have emerged regarding tax laws, cross-border movements of money and goods, and other considerations.

    “While many factors have been in and remain in buyers’ favor,” notes Kevin McFarlane, managing director for Deloitte Corporate Finance LLC, “what’s been missing has been a supply of willing sellers. Now these companies can point to several years of strong post-recession performance, which gives them confidence that they can meet their pricing expectations.”

    Buyers may have to adjust theirs accordingly, but McFarlane believes that the supply and demand lines are about to cross. “There has been a lot of talk about an impending M&A boom for some time,” he says. “Over the next 12 to 18 months I think we’ll see that this time it’s for real.”

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