With looming headwinds, middle-market M&A remains defiant

By Joe Wagner, Managing Director, P&M Corporate Finance, LLC (PMCF)

While U.S. middle-market M&A activity saw a slow start in 2019 (relative to 2018 levels), activity is projected to increase through the remainder of 2019 as public equities performance remains strong and multiple announced, sizeable acquisitions will close by the end of the year. Although deal activity has decreased from peak levels in 2015, current levels still reflect a robust market. Corporations and financial buyers continue to be acquisitive, using M&A to obtain new technologies, expand and diversify product/service lines, build platforms for further investments and as a tool to augment organic growth.

Macroeconomic growth softened in Q2 2019, and some leading indicators are showing increased weakness, escalating sentiment that a period of slower growth or decline may be likely in the near future. The ISM New Orders Index registered unchanged at 50.0 in June (indicating no economic expansion), after 41 months of consecutive expansionary readings. The Chicago Fed Midwest Index also indicated below-average growth, decreasing to -0.3 in June. However, Consumer Confidence Index reads at 135.7 (July 2019), its highest level for the year — easing some investors’ fears of an impending recession. Additionally, recent interest rate cuts have boosted economic performance, while simultaneously providing M&A markets easier access to capital at relatively low cost. Combined with record levels of private equity dry powder and strong corporate balance sheets, M&A activity is projected to remain relatively robust.

While the current economic environment encourages continued M&A activity, there are numerous impending uncertainties threatening to disrupt this position. Although the U.S. economic foundation remains strong, trade riffs between China, the 2020 presidential election, and uncertainties regarding fluctuating/contradictory macroeconomic factors all pose as threats to current economic conditions. If these pick up steam, and sentiment regarding an economic downturn continues to grow, anticipated strong M&A activity could temper in the intermediate term.

Throughout 2018, companies navigated the ever-evolving environment regarding newly implemented Chinese tariffs. Today, companies are readdressing tariff strategies as U.S. trade policy with China continues to evolve. In addition to trade policy uncertainty, fears around fiscal and regulatory policy changes regarding the 2020 presidential race weigh on investors’ minds. The combination of these headwinds — economic uncertainty, trade policy uncertainty, political (and related policy) uncertainty — hardly guarantees a prolonged period of M&A growth, and a robust environment for M&A activity today could turn into resistance in 2020.

As business owners weigh a potential sale of their company, properly preparing to mitigate any risks associated with the current state of the business cycle and the uncertainties mentioned above is becoming increasingly paramount. The past several years provided sellers an advantageous M&A environment, as buyers, flush with cash, drove valuation multiples to multiyear highs. As this market cycle begins to wane, PMCF believes business owners will have 12–18 months of runway left to transact in the current business cycle. Once this period ends, business owners will be chasing the coattails of the current economic state, potentially finding themselves transacting at a time when activity and valuation multiples have depressed.


Joe Wagner is a Managing Director and Partner with middle-market investment banking advisory firm PMCF, and also co-heads the firm’s industrials team. He has over 16 years of investment banking experience focused on the execution of buy-side and sell-side M&A advisory, shareholder recapitalizations, leveraged and management buyouts, and the private placement of senior and subordinated debt. PMCF is an affiliate of Plante & Moran, PLLC.


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