Andy Pedrette reflects on the expected drivers of continued demand for mid-market M&As.

Despite the recession, mid-market mergers & acquisitions (M&As) are still being completed, just at a substantially lower level than the past few years.

Corporates vs Private Equity

One of the contributing factors to the level of activity over the past few years has been that private equity appetite has been voracious, largely fuelled by large debt packages available for private equity backed deals. Now, the reduction in debt financing should provide opportunities for cash-rich corporates to re-enter the market at more attractive prices.

Private equity houses still have significant funds, raised in prosperous times, to invest in good quality businesses. Some houses appear to have adjusted their models and deal structures to accept less debt, or temporarily even no bank debt at all, if this is what is required to complete an attractive deal. Some also appear to be focusing more on buy-and-build strategies based on their existing portfolios.

Price Expectations

The current economic climate may seem to be driving a 'buyers' market', but activity levels in this environment are largely driven by vendors' willingness to sell.

Both corporates and private equity buyers will be looking to pay prices which reflect the current economic environment and uncertainty. This may be unpalatable to vendors, but we believe that price expectations are necessarily being adjusted. Prices are likely to involve a greater degree of contingent consideration and vendor loans may also be necessary. For vendors with realistic expectations and who are prepared to share in the risk of the future, deals are still to be done.

Opportunities For Some

The current downturn is also expected to generate its own stream of M&A activity as corporates review whether to hold on to non-core assets.

Stronger companies, with better management, more flexibility and clearer insight, will see the opportunity to acquire weaker businesses with financial problems. Defensively, companies may seek partners to mitigate falling sales/margins and relatively fixed overhead cost bases.

The strength of the euro and dollar against sterling is reflected in the increasing trend toward international acquirers becoming active in mid-market transactions. Foreign buyers are actively looking for UK acquisitions and opportunities.

M&A Activity Has Not Ceased

Smith & Williamson's M&A team has completed eight sales and four acquisitions for clients since the beginning of our financial year on 1 May 2008.

Of these, six involved overseas parties and the majority of buyers were established corporates. The minority, which were private equity driven, were almost exclusively buy-and-build strategies. Four of these deals were opportunities arising from the economic downturn, acting for either buyer or seller of a distressed business. In the remaining eight deals, the vendors were seeking either a larger partner to grow the business or a normal exit to facilitate retirement or succession.

Looking Ahead

In 2009, the market for the mid-market M&A looks set to continue to show modest activity and it appears that a return to the levels of recent years is still some way off. However, quality businesses will continue to be sought after by trade, private equity and international buyers.

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