While 2015 was a big year in M&A among large multi-national companies, middle-market firms stayed largely out of the frenzy, according to StreetInsider. But buyers and sellers in the latter are now tempted to jump on the bandwagon. The publication reported that, according to a survey by Citizens Commercial Bank, “An astonishing 60% of middle-market companies (which they define as having revenues from $5 million to $2 billion) are involved in M&A or are open to being involved in 2016…up sharply from roughly 40% last year.”
A desire to increase revenue is driving action on the buyers’ side, StreetInsider reported, with nearly 82% of firms surveyed by the bank stating that this was one of the top catalysts pushing them into deals. Potential buyers—the majority of which favor transformation rather than “bolt-on” deals, also seek to use acquisition to expand their geographic reach within the U.S., better meet market expectations, and put their cash to work.
Other factors are at work here, too, according to the 2016 M&A Outlook Survey conducted by consulting firm KPMG. Asked to describe what best explains their current strong appetite for M&A, the highest volume of prospective buyers (37%) said their acquisitions are being motivated by a desire to enter new lines of business. Additional catalysts cited in the survey encompassed enhancing intellectual property or acquiring new technologies (34%), taking advantage of a newly available strategic target (25%), a search for profitable operations and/or gain on exit (20%), a wish to invest in another function in the supply chain (16%), a response to an activist investor (13%), and defense against competition (7%). Like companies queried by Citizens Commercial Banking, breaking geographic boundaries is also behind some middle-market firms’ desire to play the acquisitions game, with 36% of those polled by KPMG stating that acquisitions appeals to them for this reason.
Meanwhile, StreetInsider said, “nearly one-third” of middle-market companies polled by Citizens Commercial Banking stated that they want to sell, and “one in 10” were involved in the selling process when the survey was conducted earlier this year. Concerns about global volatility were cited as a factor in firms’ push to be acquired; such concerns encompassed commodity prices, credit markets, the stock market, China, and the Middle East. Fifty-three percent of companies in the survey claimed to foresee another financial crisis in the next three years, which they believe will “close the window of opportunity” that is currently open.
Not surprisingly, middle-market CEOs can expect M&A activity—and the potential for that activity—to be stronger in some markets than in others. Bob Rubino, executive vice president, Citizens Commercial Banking, told StreetInsider that he sees “continued strong action” in healthcare and technology M&A. However, he said, activity is “also picking up in the beaten-down energy sector, especially for E&P and oil field services companies.” General manufacturing is seeing some activity as well, the executive noted.
But no matter what middle-market companies’ motivation for boarding the M&A train or in which segment such activity occurs, middle-market firms seem to believe there are key ingredients for M&A success. Of respondents to the KPMG survey, 39% deemed a well-executed integration plan an imperative, with another 39% naming correct valuation/deal price to the list. Effective due diligence was cited as important by 31% of respondents; positive economic conditions, by 18%; and “other” factors, by 11%.
M&A activity may not be right for all middle-market firms. Nonetheless, the volume of planned and current initiatives, coupled with the wide variety of motivations for moving ahead with these plans, seems to indicate that M&A is well worth contemplating in the near term.