The hottest sectors for M&A in 2016

Market volatility has been the name of game so far in 2016, but despite all the uncertainty, it's shaping up to be a busy year for merger and acquisition activity, in particular for middle market companies.

Last year we saw a record-breaking $3.8 trillion in M&A deals done thanks largely to several mega-deals among very large corporations. Now middle market companies are hungry for revenue growth after years spent focused on preserving liquidity and repairing balance sheets following the financial crisis.

Often referred to as the backbone of the American economy, middle market companies – those with revenues between $5 million and $2 billion – play an important role as some of the leading job creators in the United States.


handshake merger and acquisitions
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Over the past five years, Citizens Bank has annually surveyed 600 business leaders from a cross-section of industries in our Middle Market M&A Outlook to see how these CEOs and business owners are feeling about the year ahead.

In the past, respondents have been cautious due to the economy's slow rate of growth, but an astonishing 60 percent of the company executives asked about their hopes for 2016 have said they are looking to do transformative deals to help jump-start revenues. That's a sharp increase from roughly 40 percent in 2015.

Despite the uncertainty seen in the markets due to China's slowdown and other global economic pressures, a lot of executives that I speak with are optimistic that 2016 will be the year to make that transformative deal and they want to do so before the current window of opportunity closes.

In the immediate aftermath of the Great Recession, preserving liquidity and repairing balance sheets were paramount, but now company stakeholders want to see significant growth. Many firms have already reduced costs, right-sized their operations and rehabilitated their balance sheets. The best – or the only – way left to grow in today's economy is through acquisition, preferably larger, more transformative acquisitions.

Among buyers we surveyed, nearly 80 percent said that they are lean, mean and ready to do transformative deals in 2016 to increase revenues, rather than make bolt-on purchases.

On the sellers' side, some owners – in particular baby boomers whose thoughts are turning to retirement – see that the economy is seven years out of recession and believe this may be their moment to sell before the cycle takes its next downward turn. According to our survey, nearly half of middle market CEOs and business owners see another financial crisis within the next three years, which would close their window of opportunity. When we also see the re-emergence of "fatigue" as a reason to consider selling, we believe that the incentives to sell are elevated.

Market volatility is another popular reason for business owners thinking about selling. When the survey was carried out in the fourth quarter of 2015, 83 percent of respondents said market volatility was already affecting their business – a figure that can only have increased due to growing concerns over commodity prices, the stock market, China and the Middle East.

Business sectors expected to be very active for M&A in 2016 include healthcare, technology, government contracting and general manufacturing. The energy sector, specifically for exploration and production and oil field services companies, is another area that we expect to be more active than in recent years with consolidation due to companies suffering from low oil prices.

With a good mix of hungry buyers and interested sellers, 2016 is shaping up to be a good middle market M&A environment. However, those potential sellers surveyed are not demonstrating desperation in their views, so as long as both sides come to the table and act reasonably and responsibly we expect considerable middle market deal activity in 2016.

Commentary by Bob Rubino, Executive Vice President and Head of Corporate Finance and Capital Markets at Citizens Bank.

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