Q3: Middle-Market M&A Turns Down a Notch

Don't call it a comeback. Billion-dollar megadeals aside, the volume of mergers and acquisitions still drags. (For more, watch the video below.)

Global deal volume has risen 0.8 percent this year through Sept. 24, to $1.67 trillion. That's up from $1.66 trillion one year earlier, according to data from Thomson Reuters. However, once the $130 billion acquisition of Vodafone Group's (Nasdaq: VOD) U.S. wireless business by Verizon Communications Inc. (NYSE: VZ) is excluded, global deal volume drops 7 percent to $1.54 trillion.

In the U.S. middle market-transactions with price tags of $1 billion and less-there were just 513 deals in the third quarter. That's a 15 percent drop from the 604 middle-market transactions in the third quarter of 2012. Deal value in 2013 in the third quarter didn't fare any better as it hovered at $64.9 billion, whereas third quarter deals in 2012 had a cumulative value of $69.4 billion.

The dip in volume underscores a struggling M&A landscape.

"The market is still choppy," said Spencer Klein, co-head of Morrison & Foerster's global M&A practice. (For more, watch the video with Spencer Klein). "There's still differing expectations about prices and challenges related to the availability of financing."

Like Verizon/Vodafone, the $21.6 billion purchase of Tokyo-based SoftBank Corp. by Sprint Nextel Corp.- a deal Morrison & Foerster advised- helped pump up the numbers as well. But based on anecdotal evidence, a lack of deal flow was evident in most sectors, with the exception of a select few.

"We are seeing a lot of activity in certain areas of tech," reports Jim Moore, managing partner of J. Moore Partners. The planned $7.2 billion sale of Nokia Corp.'s (NYSE: NOK) handset business to Microsoft Corp. (Nasdaq: MSFT) comes to mind.

IBM Corp. (NYSE: IBM), Microsoft, Oracle Corp. (NYSE: ORCL), SAP AG (NYSE: SAP) and others strategic companies are looking for innovative technologies and solid teams to keep up with the increase in change velocity, he adds. "There continues to be a huge amount of cash on large platform company balance sheets and these companies all have an inorganic growth strategy that will keep driving M&A activity this year."

Despite the low number of deals in the third quarter, the middle market saw its fair share of action. Johnson & Johnson (NYSE: JNJ) finalized the largest middle-market deal in the third quarter. The New Brunswick, N.J.-based company completed the purchase of Aragon Pharmaceuticals Inc. for $1 billion. Further down the M&A chain, private equity firm TowerBrook Capital Partners LP, which picked up True Religion Apparel Inc. (Nasdaq: TRLG) for $835 million, highlighting the heightened demand for time-tested retail brands. Then there was AT&T Inc. (NYSE: T), which wrapped up the $780 million deal for the retail wireless operations of Atlantic Tele-Network Inc. (Nasdaq: ATNI) - a notable attempt by a telecom giant to expand its reach across the country as rivals continue to jockey for available spectrum to expand existing networks.

The middle market also saw several trends emerge, such as a heightened competition among willing buyers for good assets and healthy targets. Paulson & Co. Inc., for instance, topped private equity firm Kohlberg & Co. and won the auction for Steinway Musical Instruments International Inc., for $513 million.

There was also the $365 million purchase of Fisher Communications Inc. by Sinclair Broadcast Group. The deal underscores the uptick in M&A activity across the broadcasting sector-a space that is bound to see more consolidation due to increased spending on the part of advertisers.

Also in the third quarter, cereal maker Post Holdings Inc. (NYSE: POST), known for brands such as Pebbles and Honeycombs, announced that it was picking up Premier Nutrition Corp. for $180 million. The deal gives Post a chance to diversify its offerings, as well as a platform in the burgeoning supplements business.

Despite lingering doubt over whether dealmakers will once again reach the peaks of 2007, the current environment bodes well for sellers, observers note, as plenty of properties went to auction.

"On balance, it's a better time to be a seller than a buyer," says Stephen Schwarzman (pictured, left), founder of the Blackstone Group LP (NYSE: BX). "The Fed has moved rates so low that buyers can finance these deals at high prices."

CKE Inc., the restaurant group that operates the Carl's Jr. and Hardees fast food chains, was put up for sale by its private equity owner Apollo Global Management (NYSE: APO) after just three years of being privately owned. CKE, which postponed its initial public offering in 2012, is reportedly valued at more than $1.7 billion. The Jones Group Inc., a New York-based wholesaler of men's and women's apparel, also unveiled a sale process. Then Intuit Inc. (Nasdaq: INTU) began seeking a buyer for its Intuit Health unit, a Cary, N.C.-based provider of healthcare financial services.

The remaining question is the all-important fourth quarter. In 2012, many a dealmaker raced to close transactions in the fourth quarter as a way to take advantage of the more favorable tax rates

No such luck in 2013. Dealmakers will be looking to the fourth quarter as a crystal ball for what's in store for 2014.

"There's no artificial effect," says Ted Koenig, chief executive of Chicago-based lender Monroe Capital LLC. "This fourth quarter will be a good indication of pent-up demand for M&A. It's a more normalized cycle."