Middle Market: Mid-Year M&A Outlook

While the larger publicly traded companies dwindle in number because of regulatory and other costs, the influence of the Middle Market private business sector is staggering sheer dimensions.  Virtually ignored by academia and the media, the vitally important sector is one of the most important drivers of America’s economy and yet, it flies largely under the radar.  It accounts for a third of private sector GDP and jobs, and has been growing, in the face of the past four difficult years of “the great recession”.  If the U.S. Middle Market were a country, its GDP would rank it as the fourth-largest economy in the world, just behind Japan’s.  Clearly then, there is a need to better understand this important market sector and provide it with the level of support, attention, and advocacy it merits.*
 
* From GE Capital 2011 National Middle Market Summit, The Market that Moves America Insights, Perspectives, and Opportunities from Middle Market Companies GE Capital and The Ohio State University’s Fisher College of Business —
 
Any beginning economics class teaches that in the free market, prices are determined by supply and demand.  Based on completed transaction activity as we approach mid-year, there is an extremely large imbalance in the M&A market, with demand for companies clearly outstripping supply creating a big “seller’s market.”
 
With cash exceeding $2 trillion, strategic corporate buyers as well as private equity investors are strongly motivated to make acquisitions.  Public companies need to “buy” growth by making acquisitions.  Private equity funds must buy (and sell) companies to generate a meaningful return to the institutional investors and remain in business.
 
In addition, historically low interest rates also make acquisitions relatively more attractive investments for all potential buyers.  Even though private equity funds are actively selling to take advantage of these favorable market dynamics, many private business owners have remained largely on the sidelines in early 2012.  Part of the reason may be companies continue to struggle to earn sufficient profitably following “the great recession”.  Alternatively, some owners feel compelled to wait after calculating likely “post-transaction” investment returns.
 
However, meaningful Information about these middle market private companies can be incredibly hard to locate.  They are not regulated by the federal government and thus, in most cases, are not required to regularly file with the Securities and Exchange Commission.  The mergers and acquisitions marketplace for these companies is somewhat chaotic, highly fragmented, and often fails to capture any substantial efficiency in scale, particularly in the lower end of the middle market with private companies valued at less than $150,000,000. 
 
Role of Middle Market M&A Advisor in the economy
 
M&A Advisors provide essential liquidity to small and private businesses of America.  Large businesses have the option of going public to seek growth capital and get liquidity to their entrepreneurial efforts.  However, access to public market capital and liquidity options are not available to small and mid-size companies.  Also, entrepreneurs by nature are creative and free-spirited.  Not all are motivated to go public or want to face the scrutiny of external oversight.  They rely upon the services of intermediaries for capital access and liquidity.   The M&A Advisor facilitates that liquidity by creating a market for each transaction and managing the actual exchange process. 
 
Often without significant regard for the very special personal financial planning needs of the private company owner, this market has been served by numerous advisors and intermediaries ranging broadly from accountants and management consultants to investment bankers to small business brokers.  Unfortunately, some of these various market participants are less than fully qualified or reputable.  Investment bankers tend to concentrate on the larger deals only and may take on a middle-market business client only as an accommodation or “fill in” activity.  For reasons of economics, they primarily focus on servicing publicly traded companies and financing engagements, rather than the “full service” business and personal financial advisory needs of small to mid-sized private business clients.  Because of these current market realities, often many business owners lack access to a knowledgeable and trustworthy M&A advisor. 
 
Over 90% of all business enterprises in North America and the majority of businesses internationally are family-owned.
 
At this time of sluggish economic growth, the highly fragmented marketplace for all types of financial advisory and transaction services offers enormous potential for significant economic growth and profitability.  With the growing numbers of small businesses, revolutionary new technology, and a rapidly changing global competitive environment, the middle market is now in the midst of an extraordinary transformation. 
 
In the late 1990’s, responding to void of this overlooked marketplace, the Alliance of Merger & AcquisitionAdvisors, (AM&AA) a Chicago based, international professional trade association was formed to share information, education, trusted relationships and extensive “behind the scenes” support for highly qualified business professionals seeking to better position themselves to serve the many transactional advisory needs of small to midsized, private companies. 
 
The “Certified Merger & Acquisition Advisor” (CM&AA) credential is a “first-of-its-kind” training and certification program for the middle market attracting and M&A investment and advisory professionals of all types. 
 
In today's economic environment the lines between formerly distinct disciplines are fading, and experienced technical experts require new advisory skills to better understand and collaborate with other experts essential to the completion of successful M&A and other corporate financial transactions.  As the first recognised standard of professional competence for these types of M&A transactional advisory services, the CM&AA designation complements and extends the value of all other existing credentials and academic degrees, such as JD, MBA, or CPA. 
 
M&A advisors have an unprecedented opportunity in the middle market with the generational transfer of wealth and capital being deployed by private equity and corporate investors.  Because of the need for much better decision-making information in this Middle Market, to help others learn what is necessary about the marketplace, leading certified members of AM&AA have recently published: Middle Market M&A: Handbook for Investment Banking and Business Consulting a must-read for investment bankers, M&A intermediaries and specialists, CPAs and accountants, valuation experts, deal and transaction attorneys, wealth managers and investors, corporate development leaders, consultants and advisors, CEOs, and CFOs.
 
With strong year-to-date results in the public markets, improving credit markets, low interest rates, the second half of the year looks more encouraging.  Considering ageing private equity fund portfolio companies, improving financial performance, and likely increasing tax rates, we anticipate a mid-year acceleration of middle market M&A deal flow in 2012.
 

Michael Nall is the founder of the Alliance of Merger & Acquisition Advisors®.  The AM&AA is the leading association and credentialing body for 800 + middle market M&A professionals in 20 countries, providing connections, best practices, and education.
 
An experienced corporate financial advisor with a proven track record as a transaction advisor for privately held companies, Mr. Nall is a published author and recognised speaker on the valuation, growth, and sale of middle market companies.  With the benefit of over 25 years of experience in the industry, he leads the AM&AA development and launch of a ‘first of its kind’ professional training and credential designation for the independent corporate financial advisory community: ‘Certified Merger & Acquisition Advisor’ (CM&AA).  A licensed and retired CPA, having sold his business over 25 years ago, Mr. Nall holds a Bachelor of Science degree in Business Administration and Accounting, graduating with honors from Eastern Illinois University. 
 
Michael Nall can be contacted by calling +1 312-856-9590 or alternatively by emailing mnall@amaaonline.org.