M&A Impacts Difference in Growth Rates of Large and Small Companies

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Over the past few years, one of the most consistent observations is that larger middle market companies grow faster than smaller ones. Since the beginning of 2015, for example, the annual growth rate for the upper middle market (companies with revenues between $100 million and $1 billion) has been 8.4%, vs. 6.8% for the lower middle market (companies with revenues between $10 million and $50 million). How much of this difference might be explained by mergers and acquisitions? Quite a lot, it turns out.

We isolated companies that had not engaged in M&A in the previous year and compared their growth during that period to that of the total sample. Nearly half the growth difference evaporates when we look at organic growth alone. In the total sample, the upper middle market grew 23.5% faster than the lower; among the only-organic growers, the difference is 12.7%.

M&A is a tool that is more available to big companies than small ones. They have greater means, both monetary and managerial— easier access to the capital needed for deal making, larger executive teams, and more sophisticated outside advisors. The upper middle market may also have more motive, being at a stage where moving into new markets or adding new offerings is more easily done inorganically. In addition, they have more opportunity, since smaller companies by definition are less likely to find targets smaller than they themselves are.

Note, however, that M&A doesn’t explain all the difference in growth—a little more than half must be laid at different doorsteps. One likely candidate: digital transformation. Data from the Center shows that digital transformation is accelerating growth in the middle market, and upper middle market companies say they are more advanced digitally than smaller ones.