Middle Market Firms See M&A as Route to Growth

CLEVELAND – After middle market companies experiencing several years of low or no internal growth, more than half of middle-market executives surveyed say “that mergers and acquisitions may be the best, or only, strategy to realize meaningful growth,” Citizens Bank said Monday.

While the economy continues in recovery, said Bob Rubino, executive vice president in the commercial banking department of Citizens Bank, many middle market companies find their internal or organic growth is “sluggish,” insufficient to achieve the levels of growth they and their shareholders seek.

Hence, “Growth through acquisition is the strategy of choice,” he said in Citizens Bank’s “Middle Market M&A Outlook 2016.”

Citizens defines the middle market as comprising companies with annual revenues of $5 million to less than $2 billion: lower middle market as those with $5 million to less than $25 million, upper middle market $25 million to less than $2 billion.

“The findings of this survey serve as a call to action for buyers and sellers as growth through acquisition has become a strategy of choice,” Rubino writes. He oversees his department’s Corporate Finance & Capital Markets division.

Last year, M&A activity for middle market companies was “flat,” Citizens reported. This year, however, the survey it commissioned of 598 executives shows increased sentiment to grow through acquisition.

“Mid-market buyers and sellers alike indicate they are open and ready to act if obstacles can be addressed,” the 2016 outlook reports. “Acquisitions – particularly transformative deals – appear to be the best (if not only) avenue for many mid-market firms to achieve significant growth and meet the market’s expectations.”

In their responses, most executives said they have taken the steps needed to achieve the efficiencies needed for optimal organic growth but have still fallen short of their goals. Hence 60% of the total mid-market segment are either involved in buying a company or selling their own — or open to a purchase or sale. Twenty-two percent are in discussions or negotiations; 38% are open to making or considering an offer.

In the lower mid-market segment, 59% are either “currently involved” (18%) or open to considering such a step (41%), while in the upper mid-market 32% are “currently involved” or “open to considering” (31%) for a total of 63%. Overall, 40% said they were likely to consider such a step in the next 12 months.

More than half, 54%, of those surveyed strongly agreed “that growth through outside investment is an appropriate strategy for our company while 38% moderately agreed. Only 8% disagreed

The top three reasons lower mid-market executives gave for interest in buying another company were to increase revenues (82%), expand their geographic reach within the United States (46%) and put their cash to work (44%. In the upper mid-market, increase revenues was No. 1 (74%) but “better meet market expectations” was No. 2 (62%) while “put our cash to work was No. 3 (55%).

The top two concerns about buying were inherited liability, 45% and 44%, lower and upper, respectively; and overpaying for or overvaluing a target firm 30% and 38%. Lower mid-market executives were concerned losing key employees during or after an acquisition while upper mid-market executives listed market reaction as their third greatest concern.

Should they proceed to acquire another company, both segments were either extremely confident or confident that their companies could address their staffing needs (96%), better deal with the increasing expense of regulation (95%) and achieve their revenue goals (97%).

More than a third of all mid-market companies, 34%, reported they are either discussing or negotiating to sell their companies or open to being acquired.

Among the reasons given by executives open to selling their companies are owners wanting to cash out and alleviating owner fatigue.

Reasons for holding back include not getting the price they think their companies are worth and surrendering some degree of control should they remain after the sale.

While Citizens did not identify who conducted the Web-based survey in its behalf, it did say the data were collected between Oct. 6 and Nov. 6, 2015. Five hundred ninety-eight companies engaged in manufacturing, construction, professional services, technology, real estate renting and leasing, food and beverages, retail and consumer products, financial services, wholesale trade and health care participated.

One hundred twenty respondents identified themselves as owners or partners, 317 as CEOs or presidents and 161 as decision makers.

The statistical significance was at the 95% confidence level.

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