Middle Market Mergers & Acquisitions Recap

This latest update has been provided by William Shiry, Jr., managing director for BDO Capital Advisors, LLC based out of Chicago, Ill. BDO Capital is a middle market investment bank working with clients on mergers, acquisitions, and capital raising. As a member of BDO Alliance USA, Kruggel Lawton is proud to share this information with our clients and visitors to our website.

The environment for middle market mergers and acquisitions (M&A) continues to be very strong with activity and valuations at levels not seen since 2007. There is great appetite for acquisitions of quality companies from both strategic and private equity buyers and overall corporate confidence is on the rise.

• Strategic buyers have record amounts of cash on their balance sheets, and many are challenged to grow organically and are therefore pursuing acquisitions. Additionally, buyers have ready access to attractive debt financing in a record low interest rate environment, and public companies generally have an attractive acquisition currency in the form of fully valued shares. These conditions are allowing strategic buyers to pay more for acquisitions without suffering dilution.

• Private equity firms in total have approximately $535 billion in equity available for acquisitions, the most since 2009. Private equity firms targeting the middle market have an abundance of capital that must be deployed and the ability to obtain acquisition financing, particularly in the form of very low cost senior debt, has contributed to the ability to pay more for acquisitions. In today’s market, private equity is very competitive and often out bids strategic buyers in M&A auctions.

For companies with characteristics that make them suitable platform investments for private equity, buyer interest and valuations are very strong as there are not enough quality companies available to meet the demand. For businesses that are not suitable platforms, add-on acquisition activity by private equity firms is at a very high level. In fact add-on acquisitions represented more than half of private equity deals in 2013 and 2014, reflecting an insufficient supply of platform companies and a growing focus on buy and build strategies by funds.

The outlook for the continuation of the current bull market in M&A will be dependent upon not only the course of the economic expansion, but also on the impact of the anticipated increase in interest rates by the Fed and its effect on the availability of low cost debt financing and equity valuations in both the public and private markets.

The M&A market has proven to be cyclical and we are in the fifth year of an up market; shareholders contemplating a sale transaction would be well served by exploring their options in the current environment.

By: William R. Shiry, Jr.