Industry Sectors

Lower Middle Market M&A Outlook in 2010

While mergers & acquisitions (M&A) activity was down significantly in 2009, the deal market began to show signs of improvement in Q4 2009, a trend that will continue as the economy strengthens and access to financing is restored. Even so, expect financing to be the biggest obstacle in the deal market in 2010.

A significant number of deals will be by companies that are acquiring in an effort to improve productivity, cut costs and add economies of scale. Additional deals will be to gain geographic advantage, access new markets and secure new technology. Some larger companies also will look to acquire smaller companies that have certain product or process innovations in a bid to hedge their corporate portfolio (e.g., large brand conglomerate buying a small organic brand) or to discover the next big thing (e.g., a new way to integrate cloud computing with social media while keeping mobile).

M&A activity focuses on these types of strategies in every industry. While opportunities exist, the question is whether financing can be secured. This pressure on being able to secure financing for these strategic deals will force most activity toward the lower end of the middle market.

Companies that have been diligently strengthening their balance sheets will find that their light at the end of tunnel comes months before that of their competitors, as banks and financing companies offer low interest rates and better value overall to companies with solid balance sheets. In addition, this will start happening before the market as a whole starts to go back up in any significant way, meaning that targets for acquisition are likely to be value-priced.

Look for M&A activity to focus on preparing for upcoming environmental legislation.

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• Lower Middle Market M&A Outlook in 2009
• Lower Middle Market M&A Outlook in 2008