Middle Market M&A: Core Trends Driving Deals in 2020

By January 17, 2020 Insights

Having supported a range of clients; helped them seize opportunities, mitigate challenges and improve their business and financial strategy over the past year, Auctus Capital Partners is familiar with the many issues facing corporate America and decision-makers across the middle market.

In a recent post, we shared evolving trends that investment banks and financial advisors need to be aware of to serve SMEs in 2020. But, what about tends impacting our clients? Here are core themes that will drive deals in 2020:

M&A will Continue to Drive the Greatest Growth — M&A is responsible for the largest percentage of growth, by far, for middle market companies with at least a quarter actively acquiring (all or a part of a) business and about one in twenty selling (or divesting part of) their organizations.

Buyers seek growth by acquiring market share, expanding geographic reach, increasing industry expertise or investing in capabilities, technology, talent and new assets. Seller rationale can be tied to wealth maximization or a need to monetize business, as well as the desire to sell off ancillary divisions to focus on core business units. The intention is unique to every organization, but it is based on the idea of creating more value and synergy — which has become a commonplace strategy today.

Last year, M&A transactions reached US $3.9 trillion with new synergies and hundreds of billions in investment capital earmarked for middle market companies.

Traditional Business Loans Must Evolve — While US corporate lending has benefited from relaxed credit standards, middle market executives are not satisfied with bankers churning out loans with no added value. Even when credit markets are active, which is not always the case, the interest expense and principal amortization associated with debt financing can create a heavy burden on the cash flow of a growing organization. This will be supplanted by equity investors who can provide invaluable broad level perspective and insights to help successfully manage growth and pursue expansions, which can be as valuable as the capital itself.

Industry Convergence will Lead Dealmaking Strategy — Companies are highly motivated to use M&A as a catalyst for equity value creation, with greater industry convergence expected to be a theme across the largest mega deals as well as lower middle market transactions in 2020.

In fact, industry convergence and sector consolidation may have the greatest impact on strategy, targeting, and deal activity in the year ahead. The trend will show greater blurring of lines between companies willing to move outside of the space in which they traditionally operate to new, complementary sectors; with the emphasis on traditional customer-based expansion across markets or growing and diversifying their products and services — rather than technology acquisition, which commonly dictated critical aspect of M&A strategy.

Innovation will Employ Many Forms of Private Capital — The availability of affordable credit supported larger and aggressive transactions in 2019, but companies of all shapes and sizes are turning to a flourishing private capital industry.

Repatriated cash and rise in equities will help drive the big-ticket deals in 2020. At the same time, as activity migrates from the banking industry and public markets to private capital, all strategic alternatives should be evaluated. For example, growth equity can be an effective tool when the owners want to remain investors but also want to realize a portion of their investment. In addition, it can be an effective vehicle for providing liquidity to certain shareholders, while allowing other equity owners to remain invested in the company.

 

In general, while the spate of M&A activity is expected to continue, navigating the economic realities will not be a simple endeavor. We are in the midst of a revolution; moving towards true value-added financial advisory, serving both the c-suite as well as stakeholder constituents, and advising on what to do to transform business — not just the transaction.

As investment bankers, strategic advisors and business counselors, our role has never been more important.