Last year was a strong one for M&A activity in the midsize market sector. And for law firms — many midsize market themselves — that work with clients in that sector, the robust deal action offers a number of ways they can help better serve their clients.
Riding the M&A Wave
First, to understand the current M&A wave, you have to understand a number of factors which played a role in the brisk activity for middle market clients:
- Desire to achieve growth through acquisitions — The economy has been growing, albeit slowly. Middle-market clients have been forced to look for new means to achieve growth. M&A has been an attractive option to create this growth. In our firm’s case, strategic clients and portfolio companies of private equity firms have closed on deals with potential competitors to grow their market share or increase revenues. They consider this strategy as a more immediate means to achieve results rather than the organic growth of their existing business.
- Confidence in a recovering economy — For many of our clients, they now see the 2008-‘09 Great Recession in the rear view mirror. It’s taken years to rebound from that economic event and regain confidence in the future. Now that confidence has returned, we see strong interest from clients in entering into transactions.
- Desire to deploy capital — Private equity firm clients have raised funds in recent years and are now looking for the right platform to deploy them. This desire has been tempered by the inability to find “good” deals at the right multiples. In some cases, the strong M&A activity for middle market deals has increased multiples and made it challenging to find the right opportunities.
- Exit strategy for retiring principal owners — For our strategic clients with principal owners who are Baby Boomers, this robust M&A market has provided an opportunity for them to exit their businesses at the right time. Many of them are willing to remain with the business for a short transition period, then retire or move on to other endeavors.
- Relatively inexpensive financing terms — Interest rates have remained at historically low levels. These low rates have helped fuel debt financing for acquisitions.
Key for Clients: Valuation and Communication
Given the robust M&A environment, lawyers serving midsize market clients in these matters would do well to consider several ways they can help clients better deal with this market.
First, often in these cases, clients will have identified a buyer for their business or a target they may want to acquire, but have given little thought to the value of the underlying business or even how to determine its valuation. It’s important for lawyers to help educate their clients, especially those with closely-held businesses, on the valuation process and bring in professionals, like investment bankers, to determine an accurate valuation for the business that is being bought or sold. Too often, clients may be listening to just one potential buyer or seller and letting them dictate the terms of the deal.
Second, keep in touch with clients. Often things move fast in a frothy M&A environment, and your client may be feeling deal pressure that you’re not even aware of. Be pro-active with your communication with clients so you can help them early in the process if they are interested in a potential transaction.
And be ready when a client wants to move forward. M&A transactions often involve a team approach, and practitioners should identify the team members both inside the firm (e.g., specialists in certain practice areas like real estate, tax, employee benefits, IP and others) and outside the firm (e.g., investment bankers, accounting firms, valuation experts, etc.).
Finally, and importantly for your own sake, stay abreast of M&A legal developments. Consult news and legal resources to stay updated on the latest deal-term announcements, case law and legal trends related to M&A transactions.
We are expecting 2016 to follow in the footsteps of last year as deal flow continued at the same brisk pace at the beginning of this year. Later this year, it remains to be seen what, if any, impact macroeconomic factors will have on M&A activity for our midsize market clients. The Federal Reserve has started raising interest rates. If interest rates continue to rise in a slow and predictable manner, it may have little or no adverse effect on deal activity.
Global market instability could also cause a slowdown in M&A activity later this year, particularly if it develops into a major correction or crisis that erodes confidence in the health of the U.S. economy. This could cause clients to become more risk-adverse and take a “wait-and-see” approach until the instability subsides.
Despite potential headwinds, however, we expect middle-market M&A activity to continue to be strong in 2016 at least through the first-half of the year. This momentum may continue throughout the entire year if economic recovery and stability can be sustained.