There has been ample popular press lately regarding M&A’s declining health, mostly surrounding the drop in “deal activity,” or money invested. Fortune and Reuters both commented on the decline, with Reuters claiming that global M&A activity dropped 25% in the first half of 2012, with US M&A “dropping 44 percent from last year.”
At CMF, however, we believe these claims, while true, are somewhat misleading. The dollar value of investments may be down, but “activity” seems to have increased. We are seeing M&A professionals at middle market private equity funds and investment banks busier than ever.
What is behind this disconnect between the “activity” we are seeing and the national press headlines? We believe the following are the root causes:
- Middle market M&A operates on an increasingly more divergent path from larger deals – while the middle market may have less “sex appeal” and slightly more risk involved, the upside seems greater than for large cap deals
- Buyer and lender diligence has increased significantly, resulting in deals taking a longer time to close. We often hear that deals that were supposed to close in Q2 are now scheduled to close in Q3 or even Q4.
- The professionals at PE funds are extremely busy, selling the existing portfolio as well as buying new platforms. We suspect that many of them are operating at full capacity, particularly when we hear things like, “We would love to look at this opportunity, but we just don’t have the time and/or we are wrapped up in another deal right now.”
Our prediction is that deal volume (both number of transactions and dollar value of transaction) in the middle market (deals valued at under $500M) will increase substantially in the third quarter 2012 compared with 2011.
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