M & A Trends in the Mid-Market

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Last week, the Boston Chapter of the Association for Corporate Growth held an M&A Outlook Conference at the UMass Club. There was much discussion as to where the general economy fell on the timeline between boom and bust.

We are in a midst of a very long bull market; what was the consensus about the longevity of that market? There was general consensus that the bull market, which drives higher valuations of companies, including those on the block for acquisition, was not fully played out. Although some caution was expressed, including the thought that one should not assume that any future break in the market would be no worse than the 2008 recession, most commentators anticipated that there would be no major adjustment for nine to eighteen months, and one financial analysist thought that the current bull market might go as long as another four years.

The M&A folks noted that the first quarter of 2017 was very strong, with valuations as high as fourteen times EBITDA, perhaps reflecting the impact of the Trump Administration agenda. Particularly, it was noted that software tech deal valuations were very high.

It was also noted that there was great interest in funds resetting acquisition goals, looking to earlier stage companies; there are many funds with “too much money” chasing a finite number of deals, which tends to broaden the targets and maintain high EBITDA multiples.

Government policy is a confusion. The anti-international tone of some of the current US rhetoric likely is impacting certain deals. The promise of reduced government regulation might induce owners of smaller business to retain their businesses because the landscape would be more favorable.

There was some discussion as to whether the continued availability of “cheap money” was a current M&A driver. It was noted that cheap money generally doesn’t much affect the lower end of market deals. And indeed, the amount of leverage in the average deal is down somewhat from two years ago. Strategic deals don’t much rely on leverage either. It was also noted that many software companies have an economic model that will not sustain much leverage but, for those software and internet deals where the mathematics do work, such companies are using tremendous M&A leverage.

The median EBITDA multiples during the first quarter were a bit over seven times. Some concern was expressed that some deals were being done at 10 times EBITDA with leverage provided by “aggressive lenders” other than banks.

Bottom line predictions? In the tech sector, one panelist saw eighteen to twenty-four months of robust M&A with rising asset values, while another on the PE side saw two years of growth with particular focus on acquisition of companies with between $30 and $75 Million of EBITDA.


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