Middle Market M&A Dominates First Five Months, Strategic Most Active Buyers

Deal volume dropped in the first five months of the year but overall values are up, according to data from PwC.

There were 1,276 announced transactions through the end of May with a total value of $454 billion. This compares to the 1336 deals for the same time period in 2010 that raised $327 billion. The number of deals this year dropped 4.4% but valuations rose nearly 39%, PwC says.

Tim Hartnett, U.S. PE leader of PwC’s transaction services practice, says that it is currently a “sellers’ market” and there’s more activity than deals actually getting done. “Every sale has a lot more buyers chasing it,” he says. “From where we sit, there is a lot more activity.”

Middle market deals, or those transactions valued at $1 billion or less, generated the most activity. Of the 1,276 deals announced during the first five month, 94% were middle market. There were 1,066 middle market transactions valued at $126 billion, PwC said. “Middle market deals are getting done a lot easier,” Hartnett says. “There are a lot more companies in that range, they’re easier to finance and they’re just easier to understand.”

Cash-rich strategics, as expected, were the most active during the first five months of the year. Companies on the S&P 500 having more than $1.1 trillion on their balance sheets, PwC said. Strategics had 82% of total deal volume, or 1046 transactions worth $384 billion. This is 84% of total deal value, PwC said.

Strategics, Hartnett says, should be able to beat PE in auctions. “Strategics can justify a higher price because of the synergies they bring,” he says.

Still, private equity was busy during the first five months of the year. There were 230 deals involving PE as a buyer, representing $70 billion. There were also 22 transactions with PE firms selling their portfolio companies. This represented $23.9 billion.

The IPO market also provided a reliable exit for buyout shops. Several PE-backed companies went public this year including HCA, Nielsen Holdings and Freescale. For the first five months of the year, there were 29 PE-based IPOs raising $10.2 billion.

Hartnett says it’s a good indicator that PE firms can use IPOs as exit. A few years ago, the IPO market was shut to PE firms and strategics weren’t buying. Now, PE has several options for their portfolio companies. They can sell to a corporate or to another financial buyer, they can recap the company or they can take it public, Hartnett says.

The only bad thing about IPOs? Sponsors typically only sell a portion of a company in an IPO (if they sell at all) and offer any remaining shares via secondaries. “Because they’re not out of the deal, they’re at risk to market fluctuations, corrections and blips in the stock market,” he says.

But if a PE firm sells to a strategic, “they cash out in 90 days,” Harnett says.