Outlook for global mid-market M&A – onwards and upwards?




With a number of the world’s major economies showing promising signs of an upturn, it is unsurprising to see mid-market M&A activity on the rise. Acquisitions are once again becoming an increasingly important strategy for companies looking to strengthen their market position and accelerate growth.

M&A activity appears to be increasingly promising in Asia, as the global economy recovers and asset price volatility eases. Deal value for the first quarter of 2014 totalled US$101.6bn, with inbound M&A deals worth US$23.5bn and outbound deals valued at US$14.1bn.
Meanwhile, in Australia, M&A values increased by 41 percent in Q1 compared to last year, to US$34bn, with a five-fold increase in the number of announced transactions.

In Europe, deal value soared from £144.6bn to £168bn in the first quarter of the year, an increase of 15 percent – despite a reduction in the number of transactions. Over the same period, the value of deals in the UK reached £61bn, an increase of 24 percent on the £49bn worth of deals recorded in the first quarter of 2013.

2013 was far from a record year for mid-market M&A in the US – although the second half saw a marked increase in activity, which continued into the first quarter of 2014. In Q1 2014, 1032 deals worth over US$130bn were closed in the US mid-market. By comparison, 824 deals worth US$88bn were closed in the same period in 2013.
Market drivers
Economies of scale, growing the client base, improving profitability or planning for succession are the key drivers of this activity. More favourable market conditions, including the availability of equity and debt capital, low interest rates and strong demand for quality assets from private equity and strategic buyers, are likely to continue to boost mid-market M&A activity further.
On the buy side, concerns over the future of the euro, for example, which have caused considerable uncertainty and deterred prospective buyers interested in European businesses, appear to be easing. The situation may be slowly improving as buyers who have built up cash reserves during the good times look for higher returns and quality businesses in which to invest.

The lacklustre performance of some non-cash assets, such as gold, is adding to the ‘big bang’ effect that can occur when the market is tired of waiting for an interest rate hike and starts to deploy its cash. This can have a huge impact on M&A activity. In China, specifically, we are beginning to see many more state-owned enterprises use their considerable cash reserves to acquire quality, undervalued assets – a trend which is expected to continue.

Deal type

Some private equity practitioners in Asia expect acquisitions to focus more on control buys as opposed to minority investments. Former frontier markets in South-East Asia, with their growing economies, will continue to be a top priority for investors. Deals involving SMEs are more sought after due to their growth potential and the likelihood of producing higher returns.

Corporate acquirers in Asia – inactive over the past couple of years while building up cash reserves – may well revive their M&A appetite, encouraged by the improved financing environment to beef up operations to meet strategic objectives. With IPO possibilities still challenging, private equity investors looking to exit may find opportunities through trade sales to corporate buyers.

It’s a similar picture in Europe, where mergers and trade sales, particularly private equity backed deals, are expected to be the most active types of transaction. The willingness of banks to lend in the current economic climate to provide the debt element of such deals will be critical. The ‘hybrid’ private equity backed trade buyer is likely to play an increasingly important role in the M&A market. Leveraged management buyouts or buy-ins often require a large debt element and it seems that naturally cautious lenders will only begin to change their attitude to such deals once they see markets stabilising and more sensible returns.

Private equity, venture capital and strategic acquirers in the US have already completed 696, 684 and 381 deals, respectively, so far this year. This vibrant level of activity is expected to continue throughout 2014.

In Australia ‘vanilla’ corporate transactions are expected to increase, while at the smaller end of the scale, more flexible acquisition strategies are likely to become increasingly common.

Obstacles to mid-market resurgence
Difficulties in raising finance and a lack of market confidence remain key obstacles to M&A activity, together with an inability to match valuation expectations.

Raising finance

M&A has been generally slow to recover following the fallout from the financial crisis in 2009/10. Potential buyers have struggled to secure debt funding for deals, as banks remain reluctant to lend, instead focusing on existing customers and rebuilding their balance sheets. The success of various schemes by governments in many countries has been mixed at best. However, raising finance has become easier over the last two years and although bank finance can still be difficult to obtain, more equity finance appears to be available.

Many business owners still face difficult decisions about funding capital expenditure or acquisitions. The old adage that cash is king holds true, so cash-rich corporate buyers are making strategic acquisitions by leveraging their own balance sheets so that finance is secured on the rest of the business rather than the target.

Value expectations and deal flow
Taking the US M&A climate as a guide, there is considerable demand for acquisitions from both financial and strategic buyers, but the most significant overhang in the mid-market today is a lack of quality sellers. This has created a significant imbalance in the market, leading to highly competitive auction processes for deals which, when coupled with the availability of inexpensive debt capital, is resulting in substantial valuations being placed on these assets.

This makes it an ideal time for sellers to consider raising capital or to pursue the sale of a business given the premiums placed on quality companies with strong cashflow and growth prospects. For buyers, success will hinge on their ability to acquire quality assets outside of competitive auction processes – placing a premium on proprietary deal flow.

Meanwhile, on the other side of the Atlantic, although there are some encouraging signs of healthier multiples in the UK, for M&A deals to continue to rise significantly, vendors will need to accept that the ‘rules of the game’ have changed and realign their value expectations to new market realities. Sellers have been reluctant to lower their valuations from the highs of the boom years up to 2007/08, despite the global economic difficulties of the last few years. In contrast, buyers immediately discounted valuations and this resulted in a mismatch, which had kept deal flow static until recently.

Sectors to watch

The hot sectors appear, at present, to be niche manufacturing, medical, pharmaceutical, energy and technology, with interesting developments in the services sub-sectors such as recruitment.

The ‘headline’ global deals will also influence sector activity. For example, although the Pfizer/Astra Zeneca deal has been shelved for now, this is bound to increase interest in the pharmaceutical sector generally.

Across Asia there is a steady trend towards the consumer space. Energy is likely to see continued strong investment in the year ahead, especially in the developing markets. The telecommunications, media and technology sector is touted as the up-and-coming favourite among private equity and corporate acquirers.

In Australia, M&A activity across the mining, oil and gas and construction sectors leads the way in terms of number of acquisitions, while the technology sector is also seeing fast growth. A number of iconic Australian food and retail brands have recently been announced as targets, with foreign buyers involved in each case.

Cross-border activity

We expect most of the growth in cross-border M&A to be generated in the participants’ immediate geographical region. There is undoubtedly interest from acquirers from faster-growing economies, particularly China and India, and there may well be a case for going global when selling a niche business. However, in most cases there is sufficient demand in domestic markets to satisfy the requirements of mid-market sellers, without incurring the additional transaction costs that an international sale mandate entails.


Henry Tan is a managing director at Nexia TS, Charles Simpson is a partner at Saffery Champness and Jeremy Swan is a principal at CohnReznick LLP. Mr Tan can be contacted on +65 6534 5700 or by email: henrytan@nexiats.com.sg. Mr Simpson can be contacted on +44 20 7841 4176 or by email: charles.simpson@saffery.com. Mr Swan can be contacted on +1 (646) 625 5716 or by email: jeremy.swan@cohnreznick.com.

© Financier Worldwide



Henry Tan

Nexia TS


Charles Simpson

Saffery Champness


Jeremy Swan

CohnReznick LLP

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