The state of US mid-market mergers & acquisitions

26 April 2021 4 min. read

Deal activity in the US mid-market merger and acquisition (M&A) segment is hitting "hyperdrive" mode, according to new analysis from CIL Management Consultants. Competition is also stiff for an increasingly high-quality pool of assets.

Covid-19 hit the M&A market hard last year. Investors held on to their money amid unprecedented economic uncertainty – taking deal activity in the Americas down by 35% in the first half of 2020, according to management consultancy Bain & Company.

Inklings of a recovery already emerged by the second half of last year, and CIL Management Consultants has now confirmed the rebound is complete – an assessment based on conversations with over 50 private equity partners, investment bankers, and management teams earlier this year.

The state of US mid-market mergers & acquisitions

“While some economic uncertainty remains, our findings show a fiercely competitive market, with no signs of slowing down,” noted Axel Leichum, who was named CIL lead partner for North America in September 2020.

Well over 60% of respondents describe the current level of M&A activity in the US as "high" or "very high." And this is not a temporary spike. A staggering 96% expect deal activity to either stay the same over the next six months, or increase to some extent. Over 80% are confident that the investment environment for their business is positive over the next two years or so, with the rest feeling neutral.

Many factors are driving this optimism. One is the change of administration in the US. A third of all surveyed investors expect the Biden presidency will increase M&A activity in the market. CIL principal Rebecca Pigula explained how there are two sides to this coin.

The state of US mid-market mergers & acquisitions

“The stability provided by a new administration seems to have been well-received, but this increased activity may also be linked to potential tax increases for owners which may make them more eager to sell now,” she said. Irrespective of the administrative influence, the US also happens to be a seller’s market at the moment.

During the economic squeeze last year, much of the investment opportunities on offer were stressed or distressed assets. With financing running cold, buyers had their pick of the litter, and valuations were scraping the floor. In just a span of 12 months, things have certainly changed.

The state of US mid-market mergers & acquisitions

More than half of the private equity and investment banking representatives who spoke to CIL describe the quality of the current available asset pool as good – if not excellent. Others describe it as average, while only around 10% would label it poor. With a warming economic climate bringing investors out of their shell, competition for these assets is heating up.

Three-fourths note a highly competitive US M&A market. A strong indication for sellers on the one hand – owing to high valuations – an overly competitive market also poses a risk to investment activity. More than 90% believe that excessively high valuations will be the biggest barrier to closing a deal in the next 12 months.

The state of US mid-market mergers & acquisitions

The good news is that other challenges that were omnipresent last year – poor asset quality, economic uncertainty, and liquidity shortages – have all taken a back seat. With keen investors and quality sellers, these factors should keep US mid-market M&A going at a steady clip.

So what end will these investments come to? Most respondents plan to follow a "buy and build" value creation strategy – where a large platform is acquired with the aim of making subsequent add-ons at a later stage. Nearly 70% of investors plan to follow this route. Other popular motivations for M&A include operational improvements and geographical expansion.