The Verit View – January 2014
M&A: Big 2014 or Another False Start?
While 2013 enjoyed strong public market conditions supporting a robust and growing climate for mergers and acquisitions (“M&A” transactions), M&A activity for privately held middle market businesses has been sluggish throughout 2013. Each year since 2010, experts have been predicting the M&A market will return to levels seen before the Great Recession. With the exception of a few occasional peaks, deal activity has been largely stagnant. Verit believes that the M&A market for privately held businesses will be strong in 2014.
Factors Supporting a Big 2014 for Middle Market M&A:
Several market characteristics are typically necessary to foster a strong market for M&A deals. Many of these conditions are present today and are expected to persist throughout 2014, including record-high public markets, low interest rates, banks eager to deploy capital with beneficial terms, large cash reserves on corporate balance sheets, substantial un-deployed PE capital, and an improving economic outlook with diminishing uncertainty.
Another factor that may be at a tipping point in 2014 is pent-up demand for ownership transitions. There are many middle market private business owners that need an ownership succession plan, including family businesses where the founders’ offspring are not interested in the business. This dynamic has been present since before the Great Recession, but “paused” due to turbulent markets and persistent uncertainty. Recent data suggest that 2013 U.S. M&A deal volume through Q3 is up compared to the equivalent period in 2012 (44% by transaction value and 6% by number of transactions), indicating momentum may be building into 2014.
KPMG recently published a report indicating it expects 13% growth in deal volume in 2014. Additionally, KPMG conducted a survey of more than 1,000 M&A professionals (70% investors and 30% advisors) suggesting 63% of U.S. companies expect to be an acquirer in 2014. Only 16% do not expect to make an acquisition in 2014.
Although Verit believes deal activity in 2014 is poised for strong growth, the dynamics of the market may be changing. 77% of the professionals in the KPMG survey expect their deals to be valued at $250 million or less, which is a significant departure from the “mega-deals” completed 2003-2006. The most commonly cited reason is that smaller deals are easier to integrate, which is a significant variable in many transactions. A well-executed integration plan is also indentified as the most important factor for deal success. As a result, the middle market is expected to be the most active sector for M&A in 2014.
As always, it is Verit’s vision to bring a fresh approach and customized solutions to advise private business owners on ownership transition