Sub-$100MM Transactions Likely to Increase in 2010

Analyzing 2009 sub-$100MM M&A transaction announcements we were surprised to find, compared to the last few economic cycles, a relatively low percentage of corporate divestitures. Digging deeper we are coming to the conclusion that looking into 2010, a significant increase in this segment of the M&A market is building up.

Divestitures are typically one-third of the M&A overall market, characterized by product line and divisional sales; and deals under $100MM are the large majority of these transactions.

The following graph shows US-related corporate divestitures as a percentage of overall non-financial M&A. In looking at the graph keep in mind while divestitures are typically one-third of M&A activity, post-recession they can be up to half of all transaction activity.

Overall M&A tends to lag the stock market by several quarters, but increases in divestitures are an early cycle phenomenon as companies re-focus, sell off non-core businesses, and seek funding without additional borrowing.  So far in 2009 that has not materialized.  But upswings in a number of leading economic indicators, plus our sense of a substantive increase of M&A-related discussions, lead us to believe there will be a significantly larger number of corporate divestitures in 2010.  Additional observations support this view:

Lower Middle Market:  The sub-$100MM M&A market has always been the key to external corporate growth, not only for large strategic acquirers, but numerous small/mid-sized strategic and private equity participants.

Strategic Planning Cycle:  As the economy and markets stabilize, the 2010 corporate planning cycle will focus on strategic priorities, versus survival.  This will create more acquisition interest and more assets for sale.

Funding Environment:  Sub-$100MM deals are financeable.  Acquisition finance in the lower middle market is more available than many parties realize, particularly for conservatively capitalized acquirers.