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M& Update

In the U.S. middle market, M&A deal activity notably slackened off in the fourth quarter of 2015 and there’s every indication that the sluggish pace is continuing through the first quarter of this year.

In the U.S. middle market, M&A deal activity notably slackened off in the fourth quarter of 2015 and there’s every indication that the sluggish pace is continuing through the first quarter of this year. According to a survey conducted by Mergers & Acquisitions magazine, mid-market deal flow in the U.S. started out at a record-setting pace at the beginning of 2015 but by the fourth quarter the number of closed deals had fallen off by more than 25 percent compared to the prior year.

It’s not so hard to understand the declining trend line. Many PE buyers were already on the sidelines for the last few quarters, as deal multiples had climbed to near record levels, reaching an average level of more than 9 times EBITDA in 2015 for transactions valued between $100 million and $250 million, according to GF Data Resources. And then as the credit market began to tighten, junk bonds swooned and equity market volatility has soared, corporate and strategic buyers have begun to pull back from the deal market as well.

In the current climate, even last year’s hottest deals sectors have begun to slow noticeably. Whereas 2015 turned out to be a banner years for M&A activity among tech companies, topping the previous record by 40 percent, thanks to more than 4,000 reported deals with a value of close to $600 billion, the most recent market survey from research firm 451 Research suggests tech industry executives are much less sanguine about the prospects for corporate deal making this year.

Perhaps the best that can be hoped for is that 2016 deal flow will end up looking like the reverse of last year – starting slow and gradually picking up momentum over the course of the year. And indeed, there are some reasons for optimism as, thanks to equity market volatility, valuations have begun to retreat and sellers are becoming less buoyant in their expectations.

Moreover, as pointed out in the most recent market survey from Citizens Bank, demographic trends may also be favourable because the impending retirement of the first wave of baby boomers is likely to contribute to a significant level of mid-market M&A activity. As a result, a number of market participants have expressed the view that the lower mid-market in the U.S. is likely to emerge as a relatively bright spot for deal activity under these conditions. Often referred to as the backbone of the American economy, middle market companies – those with revenues between $5 million and $2 billion – play an important role as some of the leading job creators in the United States.

And yet for the time being, there’s no real indication of an uptick in the appetite for M&A deal making in the U.S. Yielding a meager 121 completed middle-market deals, January was the least productive month since 1991, based on data from Thomson Reuters all the way back to 1978. Deal volume for the first month of the year was half that of the same month in the previous year. Total deal value generated in January 2016 was at the lowest point since 2009.

Not just in the U.S., M&A deals have been taking a hit elsewhere too. Activity in emerging market countries such as India and Brazil dipped in 2015 and isn’t looking stellar this year. According to assurance, tax and advisory firm Grant Thornton, M&A activity witnessed transactions of $30 billion across around 600 deals down 18 percent from 2014, where 569 M&A transactions were valued at $37.05 billion.

And while Brazil M&A activity remained almost stable in terms of the currency, dozens of deals, however, were stalled amid economic and political turmoil, including efforts to start impeachment proceedings against President Dilma Rousseff. Even as Brazil braces for the longest and deepest recession since 1901, bargains are scarce.

Market anxiety is making potential buyers hesitant and even deal advisors seem to be advocating caution. In the words of David Braun, the founder of Capstone Advisory, which specializes in mid-market M&A, “rather than generating a list of acquisition targets, some of which may be in declining markets, [potential buyers] should adopt a “markets-first” approach, in which they focus their attention on opportunities, geographic or vertical, that present the best case for long term growth. Of course, in the present climate of uncertainty, that’s a task that may be much easier said than done.

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