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Mid-Market M&A; Deal Environment For Sellers

The spike in 2014 was followed by a return in 2015 to normal, according to historical averages.

Then, there is the fall in 2016, at least as of May 2016. As chronicled in a June 2016 Mergermarket/Firmex report, "Mid-Market M&A: Deal Environment For Sellers," there were 655 mid-market mergers and acquisitions (M&As) in North America between January and May 2016 - down year-to-year from 896 in 2015. The aggregate value of these deals, $56.9 billion (US Dollars), translates to a 10 percent drop year-to-year from 2015. Mergermarket says, as of June 15, 2016, there were 728 mid-market M&As, representing 26 percent of the global tally. These transactions are valued in the aggregate at $62.9 billion US Dollars, or 30 percent of the world-wide total. By contrast, transactions in the Asia-Pacific region accounted for 42 percent of global volume and 41 percent of global M&A transaction value.

The number of North American transactions range from 91 in the Financial Services sector to 148 in the Technology, Media and Telecommunications sector.

In this Mergermarket/Firmex Report, four professionals in the trenches of these transactions offer thoughts about the challenges to mid-market firms dealing with M&As and how they can weather a climate that seems to favor buyers and fetch the highest possible value for their companies and their owners.

Before plunging into a sale, companies should try to see themselves as a buyer would. Michael Teplitsky, Managing Director of Wynnchurch Capital, says that manufacturers should examine the condition of their equipment, manufacturing capabilities and other aspects of their manufacturing operation. Mary Ann Travers, Principal in Crowe Horwath, suggests removing non-operating and other extras that don't contribute to the business off of the books. She says overly-abundant executive-benefit plans and long-term contracts with break-up fees may scare away buyers of financial service companies.

As the report discusses, some sellers may operate in sectors that buyers find attractive. Jeff Cleveland, Managing Director of D.A. Davidson, sees companies in the consumer sectors, including food and beverage, as still being in sellers' markets when it comes to M&As. In particular, investors have great interest in retailers that deliver "better living" through merchandise such as active life style products and healthy foods. Strong per-unit revenues and expenses appeal to those seeking to invest in restaurants. Within the industrial and manufacturing arena, good deals can come to firms involved with aircraft, aerospace, buses, and automobiles. Mr. Teplitsky asserts the reviving economy in the United States has fueled increased demand for automobiles, while aerospace firms may increase production to replace aging airplanes.

The Mergermarket/Firmex report, which you can get here, describes shareholder activism. This phenomenon can force takeovers and lower sales prices for affected companies. Often, targets of activist investors underperform or have underperforming divisions and have shareholders or investors displeased with the current management. According to Comark Securities' Vice Chairman Jim Kofman, whose firm has participated in activist bids in the Canadian mid-market, officers and directors of firms in the resource sector are especially succeptible to attack because rising precious metals prices have undercut share values. Mid-market businesses often lack the war chests of Fortune 500 companies to fend off these attacks. As a result, these firms feel pressure to change practices or management. Mr. Kofman says this type of activism often leads to companies selling off divisions or merging.

How the company sells and to whom it sells can affect the value owners realize. Mr. Teplitsky discusses preemptive talks to gauge buyer interest and perhaps find a "unicorn bidder." Large auctions can divert management and employees from the daily aspects of running the company. Companies might also consider whether the buyer is a private equity firm or strategic one. The latter can pay more for the company with their knowledge of the market and desire or plans to incorporate the acquired company into existing operations. With large financial resources, these buyers can deal without taking on debt - which means immediate proceeds to the seller. Yet, the target gets consumed into the buyer or otherwise loses its corporate identity.

The report's "roundtable" also discusses the advantages and drawbacks for companies reaching out to private equity firms. They can bring capital to companies eyeing expansion and can coach managers in need of it. Ms. Travers advises those dealing with the PEs have a solid advisory team in place to handle the PE's thoughts on future plans for company management or direction.

The ultimate thrust of this report: how the mid-market company can get the most value out of an M&A for its owners and investors.

Supporting Documents

  1. Firmex_Mid-market_Newsletter_Q2_2016_Final.pdf