Last week, Firmex and Mergermarket released the 2016 Outlook edition of their quarterly newsletter on North American mid-market M&A. It featured a commentary piece by Tom Stewart, the Executive Director of the National Center for the Middle Market. Here is his article, which highlights the importance of middle-market companies in the past and today. The full report is available here.
Mid-market companies have been a pillar of strength for the North American economy in the last decade, standing tall when others have floundered. Now, they are using the optimal market conditions as well as their own initiative to make waves in dealmaking.
Pillar of strength
The mid-market’s strength has been seen in the past. In the aftermath of the Great Recession, 8.8 million US jobs were lost, according to the Bureau of Labor Statistics. By contrast, between 2008 and 2010, midmarket companies actually added jobs. During this period, surviving mid-market businesses added more than two million jobs, while surviving large businesses shed nearly four million. They continue to grow strongly. Top-line growth for middle market firms in the last four quarters has been, on average, 7.2%.
Mid-market companies have also been prudent and play a long game. Instead of overburdening themselves with debt or outside capital to grow, many mid-market firms prefer to pay down debt and self-fund. Indeed, according to our research, almost a third of small and mid-market firms have not raised capital in the last three years, while roughly 40% do not think they will raise outside capital in the coming three years.
Desire to deal
While the mid-market has been growing strongly organically, companies in the segment also realize that acquisitions are useful. Low interest rates are, of course, certainly incentivizing companies who want to acquire. However, the fact that mid-market companies are well positioned already means they are not as prone to macroeconomic factors as other firms. Perhaps because they prefer to fund investments from retained earnings, mid-market firms are in the main not too concerned about potential rising interest rates, at least when it comes to funding acquisitions.
There is a general attitude of buying as and when you must, and not just necessarily reacting to outside events. This is seen in our research. In Q3 2015, 15% of companies with revenues between $10m and $1b said they expected to make an acquisition in the year ahead. And 27% of companies between $100m and $1b said that they expect to do a deal over the next 12 months.
Private equity firms are also keen on investing more into mid-market North American firms. And rather than investing in order to strip assets and reduce costs, PE firms in this segment are looking to help the mid-market grow further. They want to buy in to companies, improve their management and update technology and so forth, and bring mid-market businesses into the 21st century.
Sector-specific factors are also playing a role in midmarket dealmaking. Healthcare, for instance, has been very active, much of this coming from consolidation and opportunity as the impact of the Affordable Care Act continues to take hold.
The mid-market’s role as the most powerful engine of growth in the US economy is not as widely recognized as it should be. Alongside this, dealmaking can provide these companies with a platform to accelerate the growth further. As the mid-market’s success continues, it’s important to recognize that, enable it, and acknowledge that this is the hotspot for the economy.