By Michael Sonego and Simon Johnson
The mid-market mergers and acquisitions (M&A) space is seeing a surge of interest from advisory firms who might historically be more inclined to play in the bulge bracket space.
The mid-market has long been an underrated source of M&A activity. The deals don’t have the perceived prestige of the bulge bracket, and they don’t typically involve the astronomical sums that make such great fodder for columns in the business section and bragging rights on Collins Street and Martin Place.
But what the middle market lacks in deal value it more than makes up for in volume. As outlined in the Pitcher Partners Dealmakers report, mid-market deals – defined as deals valued between $10 million and $250 million – accounted for 73% of all transactions in 2015.
Anecdotally, there does appear to be a slight softening in M&A activity, and we expect our next Dealmakers report to show evidence of a decline in deal volumes through 2016.
However, it’s critical to remember – and the large M&A advisory firms obviously have, given their new mid-market focus – that mid-market M&A will still hold the lions’ share of deal activity on a volume basis. We expect mid-market M&A will continue to represent at least 70% of dealmaking activity throughout 2016.
Again, anecdotally, we’re seeing that the buy-side in mid-market deals is splitting between large Australian listed companies and internationals.
The reason the Australian mid-market is such good value is it allows these larger listed and international companies a convenient, low-risk means of expanding into new service lines and new markets.
For the established listed companies buying-up, purchases in this bracket are unlikely to trigger the need for shareholder approval; they can likely be signed off by boards and minimise the need for protracted stakeholder approval processes. And with many deals funded from existing resources or facilities, new bank approvals often aren’t required either.
Acquisitions of mid-market firms can also support growth in existing operations and service lines, delivering better capability for the company and, critically, increased returns for shareholders.
Well-structured acquisitions in the mid-market represent less risk for big companies than a bulge bracket merger – the buyers can have a significant influence on the acquired business, and mid-market business founders are often motivated to stay on and make sure the deal succeeds.
International acquisition activity has been a key trend in M&A activity over 2016 to date. Asia continues to drive mid-market deal activity, with a significant proportion of deals originating with buyers in China, Singapore, India and Japan, but we’ve also acted for buyers in established US and European markets, including Germany and the UK. Mid-market deals are enabling international companies to get an understanding of the Australian business environment without risking large sums of capital.
One of the more interesting aspects of 2016’s deal flows thus far has been the resurgence of inbound Japanese investment and we expect this to continue to grow over the coming months and years.
For advisory firms that specialise in the mid-market, 2016 is still likely to be a solid year for M&A, as expertise and commitment to the mid-market will be valued.
Of course, some sectors will perform better than others. The resources sector will continue to lag the M&A market as a whole, while non-resources sectors with significant potential for innovation and disruption will be bright spots. Technology, media and telecommunications, leisure and business services are still the sectors to watch.
Mid-market businesses are the backbone of the Australian economy and mid-market M&A is the backbone of Australian M&A. The fact the bigger advisory players are descending into the mid-market only serves to reinforce its importance in 2016 and beyond.