sted by Justin Thomas, CPA
As we look back at 2015, the evolving M&A landscape promises great momentum into 2016 for those looking to buy or sell in the middle-market arena.
Even though the number of individual transactions slightly diminished, total deal value for 2015 is expected to surpass the record level set in 2014. This upward trend, along with many of the news headlines, are driven by the announcement of mega deals such as the AB InBev acquisition of SABMiller and the merger of Dow and DuPont.
But mega deals aside, the less-publicized middle-market M&A space also remained robust in 2015. Take a look at the following charts (provided by PitchBook) that put some of the higher level trends into perspective, examining M&A activity of companies based in North America or Europe.
As represented in Exhibit A below, middle-market deal activity (< $250 million in size) represented 85% of deal volume in 2015 and 84% in 2014.
Deals valued under $100 million have consistently represented the largest portion of volume (number of transactions).
Competition has pushed larger private equity firms and corporate acquirers into the middle market, and middle-market firms and acquirers are reaching into the lower middle market to find investment opportunities and desired returns.
As shown in Exhibit B, the median 3Q valuation-to-EBITDA multiple of 8.5x was greater than any prior year quarter. This is driven by deals valued over $250 million.
The third quarter of 2015 also saw the highest levels of equity used to fund purchase prices.
Exhibit C shows lower middle-market (sub-$25M EV) and middle-market ($25M -$250M EV) valuations fluctuating quarter to quarter, but the average for each valuation band has remained consistent.
One reason multiples are lower for companies with lower EV is that lenders are generally stricter in the amount they will lend for the acquisition of entities with lower levels of cash flow, particularly entities with less than $5 million of recurring EBITDA.
Multiples. Industry publications and the media likely will continue to remind us of the record level of M&A activity for 2015. Keep in mind the focus will be on mega deals, but the middle market has remained fairly consistent back to 2013.
Deals with EV under $25 million are averaging valuation multiples of approximately 5.0 to 5.5x EBITDA, with the larger middle-market valuations averaging approximately 7.0 to 7.5x.
Valuation. In terms of valuation, timing is less important than the EBITDA levels, growth prospects and quality of the underlying business.
Fundraising. As we look forward to 2016, fundraising activities in the private equity industry continue with increased pressure to produce required returns. Strategic activity remains high as top-line growth challenges continue and cash reserves remain flush. It appears demand will remain high if the market can continue to supply quality investments opportunities.
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