Is There a Pause in Middle Market M&A?

Is there a pause in the M&A market?

Maybe. Last week, the Wall Street Journal reported the M&A market has lost momentum in recent weeks. Deal activity slowed to its lowest point in May, totaling $67.9 billion for the month, the Journal said, citing Dealogic data. This compares to $96.7 billion in April and $105.3 billion in March, the WSJ said.

In fact, fewer deals have been announced in 2011 but their valuations are higher. So far there have been 4,525 announced U.S. transactions raising $559.2 billion as of June 21, according to Dealogic. This compares to the 5,193 deals for the same time period in 2010, valued at $401.9 billion.

One banker, who specializes in larger tech deals, says financings are “real good” while deal activity is softer but still “above average.”

The tech market, the banker says, is balanced right now and doesn’t favor either buyers or sellers. “There is a decent amount of [deals] going on right now,” the source says. “But financing in tech is stronger.”

Another banker, who also focuses on larger deals, complained that several transactions have fallen apart before they could “get across the finish line.” The source declined to give further details.

The middle market—those transactions valued at $1 billion or less—showed a similar trend. The number of middle market deals declined 25% this year while valuations have jumped 18%. There were 1,951 announced transactions in 2011, valued at $156 billion, according to Dealogic. This compares to 2,602 deals in 2010 valued at $131.75 billion.

Despite the drop in the number of MM deals, several sources maintain that the middle market is not experiencing a pause. “We’re incredibly busy,” one banker says. “The middle market continues to roll on.”

“There may be a pause in the $1 billion-plus category, but in the middle market there is no pause,” one PE executive says. The middle market continues to improve in terms of financing availability and deal flow, the exec says

Another banker says any slowdown could be attributed to the summer. Every year, M&A transactions “slow down” as bankers and execs go on vacation. Fourth quarter is typically the strongest time period for deals and IPOs. “A lot of people are waiting for the fall to announce their deal,” the banker says. “Many PE execs have hired bankers in the hopes of getting something done.”

Unlike larger transactions, the middle market currently favors the seller, several sources say. “If a good business comes to market right now, they will be the most attractive dance partner,” a banker says. “It’s a seller’s market for good companies.”

“When good companies come up for sale, there is a frenzy,” the PE exec added.