Dealmaking in the U.S. middle market continued to decline in the third quarter. The slowdown began in the second quarter, which delivered fewer closed transactions than the first quarter. Looking to the year’s remaining quarter, the signs point to further deceleration, making it unlikely that 2015 will produce the level of activity enjoyed in 2014.
While there have been glowing reports about M&A in 2015, they have focused on announced deals yet to be completed and they have been skewed by a handful of very large mergers. In the middle market, where we focus on transactions worth $1 billion or less, the numbers from Thomson Reuters make it clear that momentum has stalled. (See related graphic.) The year began well, with the first quarter delivering 602 deals valued at $77.3 billion. But in the second quarter, the numbers dipped to 560 deals at $69.4 billion. In the third quarter, the numbers dropped to 519 deals at $62.2 billion. By the end of September, 2015 had produced only 1,681 transactions at $208.9 billion, compared with 1,768 at $242.8 billion during the same period in 2014. That’s a decrease of 87 deals and $33.9 billion.Initial public offerings also suffered by comparison with the previous quarter and with the same period from the previous year, according to reports on the IPO market from PwC US and CohnReznick LLP.Nevertheless, there are subsets of the middle market that remained robust.M&A activity in the lower middle market, in which family-held businesses are motivated to sell while the economy is still relatively stable, appeared to be thriving. In September, for example, Audax Private Equity, which invests in lower middle-market companies, completed its 500th private equity deal since the firm’s first transaction in 2002. Consumer demand for healthy lifestyle products continued to drive deals in the food and beverage sector. A case in point was the $775 million purchase of Applegate Farms LLC, the Swander Pace-backed producer of natural and organic meats, by Hormel Foods Corp. (NYSE: HRL) in July. Hormel has been expanding its protein offerings and won Mergers & Acquisitions’ M&A Mid-Market Award for Deal of the Year in 2013 for buying the Skippy peanut butter brand from Unilever plc (NYSE: UL) for $700 million. In 2014, Hormel bought CytoSport Holdings, the maker of Muscle Milk, for $450 million. Companies that aim to improve agriculture also made attractive targets. Avenue Capital Group’s Boulevard Acquisition Corp. (Nasdaq: BLVD) bought the AgroFresh unit of Dow Chemical Co. (NYSE: DOW) for $812 million in July and turned it into a stand-alone public company, AgroFresh Solutions Inc. (Nasdaq: AGFS). AgroFresh makes chemicals designed to enhance the freshness of produce. For Dow, the move was part of a larger plan to exit the post-harvest market. The software sector also delivered a steady stream of deals, with many benefitting from cloud computing and the wave of high-profile online data hacks. The $635 million purchase of OpenDNS Inc. by Cisco Systems Inc. (Nasdaq: CSCO), which closed in August, leveraged both trends. OpenDNS, which raised more than $50 million in venture capital funding, provides threat protection for mobile devices using cloud services. Another notable transaction in cloudcomputing closed in July, when Francisco Partners bought ClickSoftware Technologies Ltd. in a take-private deal for $421 million. ClickSoftware develops products used by service companies to schedule and dispatch field employees. More deals are likely in cloud services. In a rare foray into M&A, Amazon Web Services Inc., a division of Amazon. com Inc. (Nasdaq: AMZN), announced in September it would buy venture-capital-backed Elemental Technologies Inc., reportedly for $500 million. Elemental develops software that re-formats video for distribution over the Internet. Clients include BBC, CNN, ESPN, HBO and MSNBC.Although momentum could pick up again in the fourth quarter, the sentiments expressed on Mergers & Acquisitions’ monthly polls suggest otherwise. For much of the year, survey respondents have expressed more optimism about the short term than the long, citing a wide range of concerns, from China’s slowing economy to Europe’s growing refugee crisis. And in the retail sector, the fourth quarter began on a down note as American Apparel Inc. (NYSE: APP) filed for Chapter 11 bankruptcy protection, underscoring the challenges retailers face, including figuring out the right number of stores in an era of e-commerce. Below is a list of selected middle-market transactions completed in the third quarter.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.