By Contributing Author
The middle-market plays a central role in the country’s economic landscape. Today, middle market companies are collectively recognized as major players in the global economy. While individual middle-market companies are usually smaller and less visible, their aggregate impact is driving economic growth and restructuring. Below summarizes the middle-market activities of 2015.
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When business people talk about merger and acquisition trends for the middle-markets in 2015, they often cite China’s gradual economic slowdown. That is, China’s tremendous economic growth is finally slowing down to the average rate of developing market economies. However, it is still growing strong at approximately seven percent. Similarly, the aggregate middle-market deal volume over the past several years has stayed at 1800 to 2000 per year and the deal value has remained at approximately $150 billion to $170 billion per year. Private equity and venture capital experts have estimated that the middle-market deal volume was about 2600 with the deal value at about $230 billion. However, unlike China’s slowing economy, the economic activities of 2014 and 2015 have spiked and slowly returned to normal.
Research conducted by Merger Market shows that the sudden increase in merger and acquisition activities started in the latter half of 2013. According to the report, merger and acquisition confidence was slowly increasing every quarter throughout the year and finally climaxed in September of 2013. However, the total deal values in the fourth quarter abruptly dropped almost 13 percent, which equated to a loss of $570 billion dollars’ worth of deals. Even worse, the 105 official deals that lapsed in 2013 resulted in the lowest numbers since 2001. In 2014, the merger and acquisition’s values reached approximately $1, 570 billion dollars. This was the highest number since 2007, which translates to a deal value increase of about 56 percent since 2013. Cross-border mergers and acquisitions was approximately 88 percent higher than 2013 and the average deal value was $371 billion.
Some speculate that the fluctuations resulted from the rapid rising of interest rates during the middle of 2013. This is because most merger and acquisition deals are usually financed with buyers who seek lower interest rates. Regardless, the interest rates normalized, but then year-over-year deals were down by 20 percent in 2015. The interest rate normalization was merely the return to the historical averages that were present after the spike in 2014. Shareholders were told to expect growth because there was an increase in the number of mega-deals valued at over $10 billion dollars. In 2015, global digitization has pushed many industries to acquire technology companies that will help them continue to expand and advance into new markets. As a result, there were technology mergers and acquisitions that valued $198 billion in 2015, which was a 10 percent increase from the values in 2014. While there is currently a valuation gap between sellers and buyers, research shows that the gap can be successfully minimized.
In 2015, chemical and industrials were the industries with the highest number of deals made. The most successful white-collar industries include media, telecom, technology, and the most successful blue-collar industries were mining, utilities and energy. The last is surprising because the energy industry has been experiencing their own internal recession. For example, Baker Hughes currently has a rig count of approximately 600, but they had almost 2200 rigs in 2014. The Bureau of Labor Statistics (BLS) has released their Employment Situation Report that shows that oil and gas employment has gone down 1.7 percent since May of 2015. Even though there are substantial declines in energy industry workers, the media, telecom and technology industries are still growing strong. Regardless of the industry, the North American middle-market of merger and acquisition accounted for approximately 30 percent of the global market in 2015.
As market prices returned to their average levels in 2015, some sellers failed to adjust their expectations and this produced a valuation gap. Closing the gap may not always be possible, but buyers and sellers minimize the distance through informative dialogue and constructive communication. Time is the ultimate tool to provide clarity on near-term risks and opportunities. Time also increases market confidence in contractual tools, such as positive and negative post-closing adjustments, which can align the parties’ values and reduce the valuation gap. Due to the fact that disagreements about the price of the target company will always emerge, buyers and sellers should rely on proven tools to reach valuation agreements. For example, sellers should always be sure to get some cash at closing because those who put 100 percent of the sale’s proceeds in contingent payments, such as notes or stock, are essentially putting 100 percent of the sales price at risk. The traditional earn-out method of allowing sellers to prove the company is worth more by agreeing on to get paid a higher price if the company achieves predetermined financial goals.
From a holistic perspective, the year of 2015 actually had some impressive achievements. For example, companies in the $51 to $100 million value range traded an average of 17 times, resulting in the average price multiple being approximately 14.5 times the EBITDA margin. The price multiples and deal values also increased for companies in the $201 to $250 million value range. They traded at about 8.7 times the EBITDA margin. As a whole, companies valued under $100 million represented almost 60 percent of all middle market deal value and almost 90 percent of all middle market deal volume. This resulted in a highly competitive environment that drove multiples to high levels in 2015. These market factors are expected to continue to drive high values and volumes in 2016.
Overall, the middle-market of mergers and acquisitions in 2015 is characterized as good, but speculations for 2016 is even better. For example, some experts point to how the rising interest rate environment might impact deals. Others cite how recent economic research projects the Federal Funds Rate moving up to the 1.5 to 2.0 percent range by the end of 2016. Either way, middle-market company owners are guaranteed to receive offers that they can’t refuse.
