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The Outlook for Middle Market Mergers & Acquisitions

On November 9, I attended the 2010 Mid-South Capital Connection presented by the Tennessee chapter of The Association for Corporate Growth (ACG) at The Peabody Hotel in Memphis. The event allowed business owners, professionals and executives from Tennessee and the surrounding region to interact with approximately 40 leading equity and capital sources from around the country.

The afternoon portion of the event consisted of break-out sessions, including a middle-market mergers & acquisitions outlook led by Randy Karchmer, Managing Director, Head of Financial Sponsors with Morgan Keegan. In his presentation, Mr. Karchmer pointed out that while the difficult credit environment and the broad economic downturn has adversely impacted M&A activity (transaction volume off over 51% from its peak in 2007), activity has rebounded from the lows seen in 2009. Additionally, transaction multiples appear to have bottomed. The year-to-date 2010 Enterprise Value/EBITDA multiple has increased to 7.3x from 5.9x in 2009 (still significantly below the 10.9x in 2007).

Other observations presented by Mr. Karchmer included the following:

  • There is significant equity capital available in the market
  • The highest quality companies are currently receiving premium valuations
  • Credit is returning for strong credits
  • Strategic M&A (synergistic buyers) are aggressive in the right situations
  • Time and expense for due diligence has increased

While the outlook appears good for middle market M&A, Mr. Karchmer also pointed out some potential risks to that positive outlook:

  • Increasing tax rates: capital gains, carried interest and income
  • Uncertainty surrounding company projections and the timing of an economic recovery
  • Threat of higher interest rates in the future
  • Deflation and the continued decline of the U.S. dollar
  • Economic ramifications of health care reform and other governmental regulations
  • High unemployment levels
  • Continued concerns regarding budget and trade deficits

There appears to be an overwhelming number of middle market transactions rushing to get completed by year-end, possibly fueled by the uncertainty over tax rates. It will be interesting to see if this momentum can be sustained as we move into 2011 and beyond.

B2B CFO®

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