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The Explosive Growth of Middle Market M&A

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Although deal volume is still running at less than half of the 2007 peak of nearly $1 trillion, M&A is making a comeback this year. A good portion of the growth has come not from the headline grabbing mega-mergers but from middle market deals ranging from $50 to $500 million, according to the independent research firm Accordion Partners.

From Accordion’s website:

Accordion’s analysis reveals that middle market deals—transactions with enterprise values ranging from $50 million to $500 million—so far this year accounted for 17 percent of M&A total dollar volume, compared to 12 percent in 2009, and 45 percent of the total number of deals versus 38 percent in 2009 That translates into more than $1.5 billion in investment banking fees estimated for middle market deals; an increase of approximately 44 percent over last year.

December will skew the middle market’s percentage of the M&A pie even more. There will be a rush of private-equity firms unloading portfolios to beat the expiration of Bush era tax-cuts at year-end. Instead of a 15 percent tax, business owners next year will be taxed at 20 percent on capital gains, and the tax on dividends—commonly used by private equity firms to recoup investments—will almost increase three-fold to almost 40 percent from 15 percent. Accordion estimates that middle-market M&A dollar volume in December will top $7 billion; if that happens, middle market dollar volume will be up 60 percent over 2009.

Of course, the question that follows from this is whether we’re seeing a middle-market M&A bubble. Sixty percent year-over-year growth is pretty explosive. No doubt much of it is fueled by cash-heavy corporate balance sheets and historically low interest rates. Many of these deals may turn out to be malinvestment, hurting the buyers when cash and credit become scarce. In the meantime, however, it may fuel a surge in the price of likely buyout targets in the middle market range.

Accordion thinks that banks will likely add to their headcounts in groups that handle middle market deals, expecting even more volume next year.

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