Q1: Volume Down, Value Up

After a slow start to 2013, deal flow within the middle market is proving to be just about as lackluster as it was a year earlier. The pause in dealmaking was especially apparent after the bustling fourth quarter, when many a dealmaker raced to close transactions under the more favorable 2012 tax rates.

In the first quarter, roughly 437 deals closed in the middle market, which we define as deals with price tags of $1 billion and less, according to data from Thomson Reuters. That's a 9 percent drop when held up against the 477 middle-market transactions in the first quarter of 2012. Deal value in 2013 in the first quarter, however, scored slightly better and hovered at $52.8 billion, whereas first quarter deals in 2012 had a cumulative value of $51.4 billion.

According to Tom Goldblatt, founder and managing director of Chicago advisory firm Ravinia Capital LLC, there should have been a greater tally of middle-market deals in the first quarter of 2013. Given low interest rates in the lending market, "there should be an incredible amount of deals," he complains.

Lengthening holding periods didn't help either. The median holding period for assets and portfolio investments has risen between 2007 and 2012, to 5.3 years from 3.5 years, Goldblatt points out, citing data from Pitchbook. "There's a counterintuitive effect where business owners are holding on, because they don't see a good place to park their money after the sale," Goldblatt adds. The end result is a lack of targets.

In the middle market, the first quarter managed to churn out a handful of notable deals. They include Avis Budget Group Inc.'s (Nasdaq: CAR) acquisition of Zipcar Inc., a Cambridge, Mass.-based provider of auto-sharing services, for $512.5 million, announced on Jan. 2, followed by Allergan Inc.'s (NYSE: AGN) purchase of MAP Pharmaceuticals Inc. for $944 million on Jan. 22. Also in the first quarter, Stanley Black & Decker Inc. (NYSE: SWK) completed its $850 million acquisition of Infastech Co. Ltd., a manufacturer of mechanical fasteners, from CVC Capital Partners Ltd. and Standard Chartered Private Equity Ltd. on Feb. 27.

Further up the M&A chain, there were some surprisingly encouraging signs of life. A handful of blockbuster deals at the beginning of 2013 had observers stirring over the possibility of megadeals finally making a comeback after several years of low M&A volumes.

The spinoff of AbbieVie by Abbot Laboratories (NYSE: ABT) was the biggest deal to close in the first quarter. It came in at $55.5 billion on Jan. 2. Then on Feb. 14, Berkshire Hathaway Inc. (NYSE: BRK.A)and 3G Capital announced a $23 billion purchase of H.J. Heinz Co. (NYSE: HNZ). Less than a week later, on Feb. 20, Office Depot (NYSE: ODP) and OfficeMax (NYSE: OMX) announced a $1.2 billion merger combining the second- and third-biggest office supply retailers. That agreement was unveiled less than a week after American Airlines (OTCQB: AAMRQ) and U.S. Airways (NYSE: LCC) voted for an $11 billion deal to combine the two carriers - creating the largest airline in the world. Then there was the Comcast Corp. (Nasdaq: CMCSA) purchase of General Electric Co.'s (NYSE: GE) 49 percent stake in NBCUniversal for $16.7 billion on Feb. 12 and Silver Lake Partners' proposal to take Dell Inc. (Nasdaq: DELL) private for $24.4 billion.

Indeed, deals worth $10 billion or more increased by 122 percent in the first quarter, compared with the same period a year earlier, according to Dealogic. Deals in this category totaled $159.5 billion and achieved the highest first-quarter level since 2005. All six of the $10 billion-plus global deals announced in 2013 involve U.S. companies, and five are U.S. targeted transactions.

The U.S. public markets were flat, reports Greenwich, Conn.-based Renaissance Capital. The volume of initial public offerings remained stable in the first quarter of 2013, with 31 deals raising $7.6 billion in proceeds. The firm anticipates a pickup in activity through 2013, given the rise in behind-the-scenes filing activity and ongoing strength in the overall equity markets.

"Am I ready to declare victory? No," Spencer Klein, co-head of Morrison & Foerster's global M&A practice, tells Mergers & Acquisitions. "I'm not sure we can say that the large public M&A deal is back." The big deals that have been announced all "have their own unique characteristics, and that may not suggest something broad across the market."

If the cautious attitude from 2012 continues to spill over into the next three quarters, 2013 may shape up to be yet another year where brave and bold dealmakers are few and far between.