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Megadeals stole the news in the first half of 2018, but what about middle market M&A?

Global dealmaking in the first half of 2018 reached $2.5 trillion, shattering previous records for the period. Mega-deals drove the 61 percent increase of dealmaking from the same time last year, with 81 announced transactions in 2018 above the $5 billion mark, according to data from Capstone. The first half of 2018 saw 23,050 deals.

In January, JP Morgan’s M&A team estimated a record 66 deals could be made this year over the $10 billion mark. The energy and power sector led the way in terms of target value followed by the media and health care sectors.

Some of the biggest include T-Mobile USA’s $59 billion takeover of telecom rival Sprint in April, Walmart’s $16 billion purchase of Indian e-commerce company Flipkart, and a bidding war between media giants Comcast and Disney, for London-headquartered broadcasting group Sky, which some analysts suggest could end up around $40 billion.

Middle Market Dealmaking – The Road Ahead

The picture wasn’t so rosy for US middle market dealmaking, however. According to Capstone’s data, the number of deals decreased 13% from 1H 2017, and deal value also declined by 6%. There were 5,960 deals in the US middle market under the $500 million cut-off with deal value reaching $111 billion. Despite this slight downtown in mid-market M&A activity, there are several factors that should bode well for a return to form in the remaining months of the year. Despite geopolitical tension and rising interest rates, corporate tax cuts stateside and stronger economic growth should help to push dealmaking in the mid-market.

“The growth of private equity funds, in particular, has created additional opportunities for sellers as well as for buyers looking for ways to finance their deals,” according to a recent report on M&A by the National Center for The Middle Market. With $200 billion in dry powder waiting to be invested, middle market companies are an easy option, targeted by 75 percent of private equity investors, says the report.

Increasing confidence is expected to drive dealmaking amongst the middle market in the second half of the year, according to the National Center for The Middle Market.

“Record-high corporate profits coupled with the availability of bank loans and other debt capital are giving more middle market companies the means to invest,” says the middle market-focused think tank. “This means there are more potential buyers for roughly the same number of targets, which explains why valuations are on the rise and the competition is getting stiffer. This is true for deals of all sizes: According to Standard & Poor’s, the multiple of EBITDA for deals has increased from 8.8x in 2013 to 10.3x today.”

Strategic M&A as a means to scale is also expected to drive the dealmaking environment going forward according to pwc’s mid-year review and outlook on M&A.

“Firms are looking to reinvent old business models and shed assets that no longer fit as the pace of technological change accelerates,” says the report. “This has contributed to an increase in the value of divestitures by 60% compared to the first part of 2017, according to Thomson Reuters data.”

It’s a trend that’s driving companies to look beyond their sectors to new business opportunities, bolstering their customer base. “Since the start of 2018, one-third of mega-deals crossed sector lines, driven largely by an appetite for new technologies,” says the report. But the interest in tech isn’t restricted to mega-deals. In May, grocer Kroger announced it was buying meal kit company Home Chef for an initial price of $200 million. Around the same time, Gannett Co. (the publisher behind USA Today) agreed to pay $130 million in cash for digital marketing software company WordStream. And small business-focused service provider Deluxe paid $43 million for marketing customization platform LogoMix.

Technological disruption and strategic scaling up should contribute to a healthy dealmaking environment through to the end of the year, however it remains to be seen whether the trend toward large deals will continue to create a drag on mid-market dealmaking activity.

As Blair Effron, co-founder of advisory firm Centerview Partners, told the Financial Post recently: “Big shifts in technology are forcing companies across all industries to be creative and forge more strategic combinations – adding in economic tailwinds and a continuing strong financing environment makes the current robust M&A market unsurprising.”

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