The first post in a series based on the research report Middle Market M&A: What Executives and Advisors Need to Know to Make the Most of Mergers & Acquisitions, by the National Center for the Middle Market, this blog post looks at the prevalence of M&A activity among middle market companies and explores reasons for the increased intensity in the deal-making arena.

The number of mergers and acquisitions happening in the middle market isn’t increasing. But the competition around the deals most certainly is.

According to the Middle Market Indicator, every year, roughly 20% of middle market businesses acquire all or part of another company, and about 5% of businesses sell or divest all or part of their organizations. This percentage has held more or less steady since the Center began measuring it in 2015. While some organizations in this group are serial dealmakers—they buy or sell regularly as part of their business strategy—the majority of companies making an acquisition or selling a business in the past three years are relativity inexperienced or first-timers.

While the rate of M&A is fairly steady, the buzz, excitement, and intensity are very high. The reason: Competition for the deals being done is on the rise, leading to higher valuations and increased intensity.

Here are a few reasons why:

  1. Favorable economic conditions and increased confidence are bringing more players to the game.
    Record-high corporate profits coupled with the availability of bank loans and other debt capital are giving more middle market companies the means to invest. In addition, Middle Market Indicator data show that executives’ confidence levels are very high and that most companies want to invest extra cash. This means there are more potential buyers for roughly the same number of targets, which explains why valuations are on the rise and the competition is getting stiffer. This is true for deals of all sizes: According to Standard & Poor’s, the multiple of EBITDA for deals has increased from 8.8x in 2013 to 10.3x today.

  2. The need for strategic M&A is growing.
    Beyond favorable economic conditions, our research shows that more middle market executives, especially those at larger companies, are looking at M&A opportunities for strategic reasons. In fact, according to the research, ‘industry changes’ edges out ‘favorable economic conditions’ as a top reason for pursuing M&A. For many businesses, the consolidation of competitors and suppliers highlights the need for strategic acquisitions—scale is critical to competitive advantage and growth strategy. Executives may also feel there is limited room for organic growth in their markets, so they look to M&A as a means to expand and acquire new capabilities and customers.

  3. Vast amounts of private equity funding are looking to be put to work.
    According to data from Thomson Reuters, about $200 billion in private equity funds was waiting to be invested at the end of 2017, up from around $130 billion raised by the same time the year before. And middle market companies are the number one target for those funds. Findings from a Probitas Partners survey of 98 institutional investors show that three out of four investors say they want to source deals from the pool of U.S. middle market companies. Indeed, so high is the demand from investment funds that they are putting a higher percentage of equity into deals.

Good deal-making capabilities are more critical than ever.

With financial and strategic buyers competing more aggressively for available deals, it is imperative for middle market companies to be deal-ready if and when they choose to get in the game, whether they are buyers or sellers. To learn more about the current middle market M&A landscape and how to best participate in it, download the Center’s full report, Middle Market M&A: What Executives and Advisors Need to Know to Make the Most of Mergers & Acquisitions.


Next in this series
Post 2: It’s About Growth: M&A Is A Strategic Tool for Middle Market Companies Looking to Expand