Capital Ideas | Newsletter Q1 2017

Capital Ideas for Middle Market Businesses

Middle Market Business Insights

The total number of closed transactions in 2016 for mid-market companies ($5 million to $500 million in revenue) declined 15% across the US in comparison to 2015 from more than 8,000 deals to just over 7,000, according to data from industry tracker Factset.

The slowdown in M&A activity relates to a wide number of factors including the US election, economic uncertainty resulting from Brexit, the slowing Chinese economy and even Russia’s aggression in the Middle East. There are also continuing significant macro factors that may impact M&A going forward including immigration issues with the new administration, volatile commodity prices and continuing regulatory scrutiny.

From a geographic perspective, the Eastern states were the most active in 2016 with almost 4,000 mid-market deals closed. The Western region had almost 1,800 transactions closed in the mid-market range while in the Midwest 1,300 mid-market deals were closed.

Oil and Gas M&A Return

International benchmarks Brent crude and U.S. West Texas Intermediate oil settled in a range between $40 and $50 a barrel in the third quarter spurring an uptick of M&A activity in the oil and gas sector in H2. The sector generated approximately $196 billion of deal value in 2016 according to data from international consulting firm PWC, with $85 billion of that deal value coming in Q4. Part of the spike in Q4 stemmed from a return of oilfield services M&A, which generated deal value of approximately $29 billion.

The sectors that saw the most mid-market M&A activity during 2016 included industrials (more than 2,000 transactions closed), technology (1,300+ transactions closed) and consumer products and services (1,300+ transactions closed). The technology sector drove the highest EBITDA multiples (10x+), which were sparked by software as a service (SAAS) transactions and other proprietary tech-enabled service businesses.

Overall M&A Market

There were a number of large M&A deals announced or closed in 2016 that involved major brands and had the power to re-shape industries. Some of the more notable transactions included:

  • In October, AT&T and Time Warner announced the largest deal of the year, an industry-shifting $85.4 billion merger. The deal is not yet final as many deem the marriage between the two media behemoths as anti-competitive.

  • The second-largest deal of the year was announced in September by German pharmaceutical and chemicals giant Bayer, which said it would buy U.S. seed and agricultural chemical company Monsanto. The combined company would control over a quarter of global supply of seeds and pesticides, assuming the merger is completed.

  • In March, Sherwin-Williams agreed to acquire its primary competitor, Valspar for $11.3 billion. The deal would give Sherwin-Williams better access to big box retailers such as Home Depot and Lowes, where Valspar already has a strong presence

  • In late November, Sunoco Logistics Partners agreed to purchase Energy Transfer Partners in a $21 billion all-stock deal, while also assuming some $30 billion in long-term debt on Energy Transfer Partners' balance sheets.


While M&A activity was not as frothy in 2016 as it was in 2015 there was still a large amount of activity driven in part by low financing, corporate balance sheets with extensive cash resources and private equity groups with more than $500 billion of dry powder waiting to be deployed.

The outlook for 2017 is positive and is expected to bring more activity than last year with the election behind us and the promise of lower corporate taxes looming. Short-term challenges involving political upheaval and shifting regulations is expected to be overshadowed by continuing economic growth as the year marches on. Still, this remains a fluid situation as international trade deals seem to be in a state of flux for the time being.

According to data from industry tracker Mergermarket, the US is expected to see one of the largest increases in M&A activity in 2017 driven in part by the technology. The Fintech sub-sector is expected to see the greatest increase in global M&A activity, driven by analytics and data tools to streamline processes.


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First Quarter  |  2017