Spring 2009 – Middle Market Analysis

The M&A market has slowed consider considerably, with one exception: transactions under $50 million.

There is an abundance of news about the economy, the tightening of credit markets and the related impacts on companies – both large and small. Not surprisingly, these same conditions that make for a challenging business climate have also had a significant impact on mergers & acquisition (M&A) activity over the last twelve months. According to Dealogic, US mergers & acquisitions decreased 29% to approximately $1.1 trillion in 2008 – the first contraction after five years of consistent growth. In 4Q08, US deal activity decreased by 60% when credit froze and private equity firms – who were responsible for more nearly 20% of all M&A volume in 2007 – were unable to secure debt and, consequently, were challenged to get transactions closed.

Actually, 2008 was not all bad. Global M&A volume for 2008 still reached the fourth highest yearly total on record. And for the first half of the year, the number of transactions was increasing even as the average deal size was decreasing. A larger number of smaller transactions was reflective of strength in the lower middle market. In fact, according to a William Blair report, the number of US transactions under $50 million was up by more than 20% over 2007, and the total value of transactions under $50 million increased by 8.5%. According to the Blair report, the “under $50 million” sector was the only market segment that showed growth over the M&A records posted in 2007.

Why did the lower middle market fare better than other segments in 2008? We at ASG believe there are two separate but closely related reasons. First, lenders were still actively financing smaller transactions for most of the year - even while they shied away from larger transactions. And second, since credit was available for this segment, many financial and strategic acquirers shifted their attention to this segment of the market.

As for the first part of 2009, US transaction volume in the first quarter was up 39% over the same period in 2008 and was almost double the deal volume from the fourth quarter of 2008. Even so, most of the growth in the US came from two very large transactions – both of which were related to consolidation in one industry. The number of US transactions completed in the first quarter of 2009 fell 30% and the global deal volume fell 21% year over year.

M&A activity levels are expected to remain relatively unchanged for the next 6 to 12 months. Business owners whose companies are growing and are under $50 million in value will continue to receive competitive offers at high valuations. Our advice to everyone else: use this time for planning (see ASG’s advice in this newsletter). When it comes to exiting a company, the results of good planning can be extraordinary.

For more information on current market conditions, call 425-450-4800 or email info@asgpartners.com.


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