KUHN CAPITAL Sunday, February 25, 2018
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The M&A Beat Goes On... for Now


It’s official: middle-market M&A volume has not slowed much despite drastic cut-backs in megadeals, recession fears and generalized consumer pessimism.

The credit market’s meltdown hit deals valued over $1 billion starting last August when the number of announcements fell from Thomson’s index of 400 to nearly zero (an index value of 100 is the baseline). The big deal index has been bouncing between zero and 50 since. Translated into deal numbers, that means only 12 leveraged deals over $1 billion have been announced since last July. Contrast that to 13 announced last May alone.

On the other hand, deals valued under $250 million peaked last October -- well after the credit crunch began -- and since then their number has only declined by about 15% compared to the blistering first half of 2007.

The usual explanation for why middle-market M&A remains relatively robust centers around lender comfort: banks find the lower leverage EBITDA multiples acceptable, their anxieties are soothed by imposing higher interest rates and tougher covenants, the deals are less complex, and the PE firm sponsors appear less rapacious.

We’d like to add another factor. Middle-market targets are more likely to be privately-owned by aging baby-boomers looking to exit. Not only are they contemplating retirement, many have also concluded that a Democratic President will raise taxes. Better to move now rather than pay stiff capital gains and income levies later. Finally, some of these owners believe we’re entering a slow-motion recession that will eventually crimp profits.

So age, tax fears and the possibility of slowing sales makes middle-market owners more willing to accept “reasonable” valuations. We think they’re right to get out now while the getting’s good.

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