Light At The End Of The Tunnel

For middle market M&A, we see the light at the end of this tunnel. Over the past 30 years, after major economic shocks and market bottoms, there has been about a two year “recovery” period where deal volumes were steady, but the deals that got done were primarily those with compelling circumstances or motivations.

This recovery period for M&A makes sense for a number of technical and behavioral reasons. After a major shock, it takes that long to get a clean set of trailing twelve month operating results and forecasted budgets, that both buyers and sellers can value and agree on.

So where are we? A graph of global and US deal volumes sheds some "light".

Lower middle market M&A activity for the first half of 2010 showed a modest uptick in volumes from the market bottom in mid-2009. More importantly it was characterized primarily by non-distressed deal flow, and in the late winter and spring, some remarkably robust multiples for high quality targets. However market volumes are still off 30%+ from 10-year averages, and both transaction counterparties and financing sources are approaching new deals cautiously. If that time frame holds true this time around – from the market bottom in spring 2009, this state of affairs will continue into early 2011.

In this sort of a “deal or no deal” environment, positioning and preparation are critical success factors. For sellers, insightful presentation of a company’s strategic positioning and goals, recent financial performance and future opportunities are critical. For buyers, ascertaining strong strategic fit and negotiating “win-wins” regarding valuation and structure are equally tricky. Deals wills certainly be “do-able” but it will be a market where transaction experience, and anticipating potential deal-breakers, will be a difference maker.