2013Trending in M&A: Cautious Optimism in the Middle Market

August 19, 2013

A slow, yet improving economy has developed a trend of cautious optimism amongst middle market players in the mergers and acquisitions market.  A close look at trends, perceptions in the market and strategic avoidance of pitfalls prior to entering the market will glean fruitful transactions for middle market businesses in 2013.

Acquisition vs. Organic Growth

In the battle to increase revenue in 2013, middle market businesses are quickly determining the winning strategy in the current market is acquisition versus organic growth of their company.  The present mergers and acquisitions environment following the slow and nearly stalled M&A market of Q3 2011- Q4 2012 has created a ‘perfect storm’ for middle market acquisitions in 2013.  Three key factors underscore this ‘perfect storm’:

  • A slow, yet improving economy
  • Historically low interest rates and abundant private equity capital
  • Demand amongst middle market companies for growth through acquisitions

These factors illustrate the cautious optimism of buyers and sellers in the current state of the market.

A Buyer’s Market?

Close to 80% of middle market firms say they are currently engaged in or are “open” to acquiring a target.  Of this 80%, four in 10 firms are not actively combing the middle market to buy, though they would consider an acquisition if the right opportunity presented itself.   Only one quarter of this 80% are actually in the process of an acquisition and another 14% are actively seeking to purchase targets.

Despite these encouraging statistics, only three out of 10 middle market companies actively in the acquisition market feel highly confident that they will complete a transaction in the upcoming year.

Sellers – A lot of Talk with an Inability to Walk the Walk

Many sellers unwittingly handicap their own ability to maximize their value by not approaching the market from a position of strength.  The utmost concern of sellers is being underpaid or undervalued when entering the foray of M&A.  This is particularly true amongst sellers in the middle market.

A close look at the potential pitfalls will save sellers from handicapping themselves in the current market:

  • Only a minority of sellers engage an expert.  Approximately four in 10 sellers are currently working with or would consider working with a broker, investment banker, business transfer intermediary or other third party expert to manage the process.  The experience and objective perspective an expert can lend to the process can prove immeasurable.
  • Avoid misreading the market.  Approximately 75% of middle market executives view current conditions as a buyer’s market, however the current market conditions have culminated to a larger number and larger supply of buyers — the takeaway: competition is fierce.
  • Keep an open mind.  Most executives and middle market business owners desire to sell of their entire company.  So far in 2013, the majority of active deals in the middle market are for a partial sale.  A full understanding of the various structures available to maintain the majority or a reduced stake while procuring the desired liquidity may bridge the gap between a deal and deal fatigue.

Financing and Private Equity

Due in large part to low cost debt, there was a 15.6% increase in private equity buyouts in the U.S. during Q3 2012, compared to Q3 2011.  Emerging from the drama of the fiscal cliff and boosted confidence of market makers, the growth of the U.S. economy and subsequently deal volumes in the middle market has improved the playing field for private equity.  Three signs of health in the private equity arena have surfaced in 2013:

  • Real estate rebound.  With the real estate market still licking its wounds, now is a great time for investors to find deals.  Real estate funds accounted for the largest apportionment of private equity capital raised in Q4 2012.  The recovering real estate market has boosted the real estate fund activity, coupled with historically low level interest rates.  Opportunity funds, which funds categorically look to take advantage of reduced real estate prices, raised $35 billion in 2012, a 45% increase from 2011.  According to PERE, a global news service for private equity real estate professionals, 156 private equity real estate equity funds raised a total of $75.5 billion during 2012, which is on target with that was raised in 2011.
  • Generalist funds are underrated, overcoming the negative stigmas and making a comeback.  Strong returns and proven track records have generated solid results.  According to Mark Jones, a partner with River Associates Investment LLC, an investment management firm in Chattanooga, Tennessee: “what resonated with our investors was that they were banking on an established team with a long, strong track record that has been consistent.  You can have a great industry focus and not such a great team.  That won’t work.  Track record speaks the loudest.”  River Associates closed its latest fund with $222 million in commitments – twice as large as its previous fund.
  • Middle market momentum.  According to M&T Bank’s Commercial Banking Division’s Q1 2013 economic outlook survey, 44% of middle market companies surveyed expect their industry to improve over the next 6 months, with only 14% of those surveyed expecting their industry to decline.  Business Development Companies, Small Business Investment Companies, mezzanine funds and Collateralized Loan Obligation vehicles all experienced significant inflows of capital ready to be deployed as loans to middle market companies.  There appears to be no shortage of debt available to the middle market.


It’s an exciting time to be a middle market business owner.  The current market is abundant with transaction-based growth.  For those who undertake a diligent and thorough valuation process, understand the risks and capitalize on this ‘perfect’ storm’ with external expert support to identify and assess opportunities, there are many paths to pivotal success.