Has Mid-Market M&A Come to a Dead Stop, or is This a Momentary Pause?

January proved the strongest month of 2015 for completed middle-market deal volume, according to data provided by Thomson Reuters. But the news got worse as time went on. By the time Mergers & Acquisitions published our mid-year wrap up, we were already suggesting that 2015 was front-loaded. By year’s end, the 2015 tally of completed deals fell 200 transactions short of the previous year, a decline of 8 percent. The fourth quarter showed a dramatic dip, with 167 fewer deals closed than the same period a year earlier, representing a 26 percent drop. (See Month-by-Month Look at 5 Years of Mid-Market M&A by Volume).

What was happening in the middle market may have been somewhat obscured by the attention paid in the mainstream business press to the announcements of mega deals, accompanied by headlines proclaiming the year a banner one for M&A. But not only were those deals way above the $1 billion threshold of the middle market, they were also only announced deals, not completed ones. Whether or not they pass regulatory muster and other obstacles and actually close remain open questions. Inflated valuations, the likes of which had not been seen since pre-recession 2007, permeated the landscape. The high prices kept many dealmakers away, especially private equity firms that could afford to wait for prices to come down. 

Another factor that entered into play at the end of the year was the rising price of debt. In January, the Availability of Financing component of Mergers & Acquisitions’ Mid-Market M&A Conditions Index (MACI) continued its decline into contraction territory and hit its lowest level since we began our monthly surveys in the fall of 2013. “People are having a more difficult time getting financing,” says Paul Aversano, a managing director at Alvarez & Marsal. “We’ve seen several deals in the last few weeks where the buyer paid the whole thing with equity, figuring they’ll refinance later.”

The overhang of deals from the previous year is weighing heavily on dealmaking in the first quarter, says Bob Rubino, head of corporate finance and capital markets for Citizens Commercial Banking. At the beginning of 2015, it took six weeks to clear the inventory, and there was only one sector affected, energy. Now in 2016, there is double the overhang, and it’s affecting all sectors. “It will take the better part of the first quarter to clear through that inventory.”

Dealmaking may pick up again later in the year. Citizens Bank’s 2016 Middle Market M&A Outlook indicates that more than half of mid-sized U.S. companies are looking for transformative deals to help them jump-start revenues in 2016. The expectations of buyers and sellers may be coming together, with 56 percent of the participants on the Citizens survey predicting valuations will stay flat or go down.

The results of Mergers & Acquisitions’ monthly surveys also suggest activity may increase later in the year, with dealmakers giving higher scores to the 12-month outlook than the 3-month outlook. See Mergers & Acquisitions' Mid Market Pulse (MMP), published in partnership with RSM LLP (formerly McGladrey). The aging of the baby boomer generation may prove a boon to dealmaking, especially in the lower middle market. More than one third of U.S. business owners are 55 and older, according to U.S. Census data. As the baby boomers age and feel “owner fatigue,” as Rubino puts it, they are more ready to sell than ever before. Having seen many economic cycles come and go, they may be motivated to get out while the going is good. 

Editor’s Note: To measure activity in the middle market, Mergers & Acquisitions looks at transactions that fulfill several requirements: Deals must have a value of roughly $1 billion or less; they must be completed (not just announced) within the timeframe designated; and they must include at least one U.S. company in the role of buyer and/or seller. Excluded from our charts are: recapitalizations; self tenders; exchange offers; repurchases; stake purchases; and transactions with undisclosed values, buyers or sellers. Our data provider is Thomson Reuters, which updates its databases continuously. We use the data available at press time. For this article, data was collected on Monday, January 4, 2016. For more on M&A data, see:10 Years of Mid-Market M&A by Volume and Value; and 10 Years of Mid Market Leveraged Buyouts By Value and Volume. Below is a list of selected middle-market M&A deals completed in 2015.