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Mid-market deals are fuelling an M&A rebound

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Research by EY shows that the mid-market is picking back up. Deal flows are returning to 2006 levels as a growing number of companies expect to do deals over the next 12 months. 

Almost two thirds (60 per cent) of respondents of the survey, which interviewed 1,600 senior executives in more than 60 countries, expect deal volumes to increase further in the next 12 months – even after a relatively positive 2014 for M&A.

“Our previous Barometer predicted the wave of mega-deals seen in 2014. These multi-billion dollars deals are having a ripple effect on the M&A market. They increase confidence in M&A and trigger transaction activity further down the deal chain,” says Pip McCrostie, EY’s global vice chair for transaction advisory services.

With the appetite to acquire at its highest for three years, EY now expects a new wave of M&A with much more focus on mid-market sized deals under $1bn. 

“This new middle-market momentum should lift M&A activity as companies seek to strengthen – and expand – their core business. The result should be a far more buoyant deal market than we’ve seen for the past five years,” adds McCrostie.

Mega-deals

So far this year, the M&A story has focused on mega-deals, and the climate continues to remain favourable for large acquisitions, says the report.

However, the growth of M&A for the next year should be in the wave of middle-market deals, with a major shift in focus among respondents looking to do deals valued at $250m and under.

“The majority of companies are focusing on acquiring businesses in their core sectors, with an eye to boosting market share, managing costs and improving margin growth. As cost efficiencies are paramount, for the vast majority, planned M&A activity will consist of bolt-on acquisitions that will complement their current business model,” McCrostie explains.

While the majority of companies are focusing on acquiring bolt-on businesses, more than a third (37 per cent) still expect to undertake transformational deals. The upper end of the M&A market should continue to see mega-deals, but EY now expects a formerly subdued middle-market to vigorously enter the fray.

“After years of contraction and stagnation, deal activity globally looks set to return to pre-crisis levels. The transformative deals hitting the headlines in 2014 are set to continue. However, the next chapter of the M&A story should be mid-market momentum taking deal activity to new heights,” adds McCrostie.

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