60 Percent of Middle-Market Companies Open to M&A in 2016

January 15, 2016 2:54 PM EST

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Buyers and sellers in the middle market are getting that itch. An astonishing 60% of middle market companies (revenues $5MM to $2B) are involved in M&A currently or are open to being involved in 2016, according to a new survey from Citizens Commercial Banking. This is up sharply from roughly 40% last year.

While 2015 was a boom year for M&A for large multi-nationals, the middle market was largely left out of the frenzy. Despite much optimism going into the year, volumes were flat and EBITDA valuations were down roughly 1 turn from 2014’s high watermark, Citizens EVP of Corporate Finance & Capital Markets, Bob Rubino, told StreetInsider in an interview. This could all change in 2016 with both buyers and sellers lining up to create an ideal environment for deals.

Inward inquiries on M&A are up sharply as many buyers and sellers feel the time is now, Rubino highlighted. In fact, he described the case of a buyer turning into a seller after getting a sense of valuations in the market.

Driving the action on the buyers' side is a need to increase revenue. Nearly 82% of buyers said this was one of their top reasons pushing them into deals. These buyers are also looking to expand their geographic reach within the U.S., better meet market expectations, and are looking to put their cash to work. Worries about inherited liability and overpaying are the key concerns facing buyers. Buyers are also looking for transformation deals, versus bolt-ons.

On the sellers' side, they voiced concerns about global volatility influencing their decision. Those volatility concerns included commodity prices, credit markets, the stock market, China and the Middle East, among other things. Also, 53% of lower mid-market firms see another financial crisis within the next 3 years, which would close the window of opportunity. The survey showed nearly one third of middle market companies want to sell, with one in ten currently involved in the selling process.

Rubino sees continued strong action in healthcare and technology M&A. However, he also notes activity is picking up in the beaten down energy sector, specifically for E&P and oil field services companies. Another area that is active currently is general manufacturing which has been under some pressure.

One thing that could impact M&A is jitters in the high-yield market. Rubino explained that this is a case of the "have and the have nots." BB paper is getting done but anything more speculative is getting shut out, he said. In fact, the high-yield market has already impacted at least one deal the firm was involved with. The buyer in a highly leveraged deal had to walk away in the fourth quarter after not being able to get financing in the fixed income market. The seller, however, was able to negotiate with another buyer who executed the deal in the still liquid bank market. The seller did not have to sacrifice on price.

Another thing buyers and sellers have to consider is possible delays in the time to close a deal. Rubino explained that time needed close a deal was up sharply from earlier in 2015 as banks got stuck with a lot of paper on their books at the end of the year after unsuccessfully trying to syndicate it in the market. He said it will take a while for banks to clear this inventory. "The overhang in the industry is double of what it was last year at this time," he said.

Overall, one thing is certain, according to Rubino, "the time is now for mid-market M&A."



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