A recent article published by Mergers & Acquisitions, an online publication produced by themiddlemarket.com, caught my attention. In her article, “Has Mid-Market M&A Come to a Dead Stop, or is this a Momentary pause?,” author Mary Kathleen Flynn indicates that deal-making in Q4 2015 dropped by 26 percent from Q4 2014, and January 2016 was downright sluggish.
According to the article, the number of completed deals in 2015 fell 200 transactions short of the previous year, a decline of 8 percent. Q4 showed a 26 percent drop, with fewer than 167 deals closed than during the same period a year earlier.
The reasons Flynn cites for this downturn include:
- Inflated valuations permeated the landscape, the likes of which had not been seen since pre-recession 2007. The article suggests that high prices kept many dealmakers away, especially private equity firms who could afford to wait for prices to come down.
- The rising price of debt entered into play at the end of the year, making transactions more costly.
- The overhang of deals from the previous year weighed heavily on deal-making volumes last year, but this should rebound as companies complete their integration processes.
M&A activity in the accounts receivable management industry is also down. This is not because buyers and sellers lack interest in completing transactions – there is plenty of interest. Instead, three major motives are driving this trend:
- Similar to the general middle market, some of the larger players in the ARM industry are ingesting the companies they purchased. This takes considerable time and resources away from additional transactions.
- The due diligence process is taking longer than it has in years past as buyers fixate on compliance requirements. Once a 60- to 90-day process, it now takes 120 days or longer to complete.
- Some sellers are still not willing to share the risks associated with a transaction. They refuse to lower the purchase price or increase the deal terms to reflect uncertainty or erratic financial performance.
Topline is confident the drop-off in the number of ARM transactions is short-lived, and it’s not a reflection of the level of overall interest in mergers and acquisitions in the industry.
The results of the Mergers and Acquisitions’ monthly surveys suggest activity may increase later in the year, with dealmakers giving higher scores to the 12-month outlook than the three-month outlook. The aging baby boomer generation may also prove a boon to deal-making, especially in the lower middle market. More than one third of U.S. business owners are 55 and older, according to U.S. Census data. As the baby boomers age and feel “owner fatigue,” they are more ready to sell than ever before.