Daily News: February 12, 2014

RBS Middle Market M&A Outlook 2014: Reinvestment a Theme

The RBS Citizens Middle Market M&A Outlook 2014 reveals middle market companies remain open to buying or selling but are prioritizing opportunities to reinvest in their existing operations.

“Our latest survey indicates that the appetite for acquisitions and sales remains strong, but businesses are taking a more strategic, less urgent approach, which reflects a strengthening economy,” said Bob Rubino, EVP and head of Corporate Banking and Capital Markets for RBS Citizens. “As more middle market companies see top-line growth, owners are looking for strategic sales or acquisitions that can augment their re-investment strategy and help keep their momentum going.”

Key findings from this year’s survey include:

  • Sellers are more interested in selling part of their business than the whole.
  • While interest in raising capital remains steady, companies are less likely to take on debt and are more likely to accumulate earnings, sell a business unit or divest significant assets to make investments.
  • Executives believe both this year and next will be a ‘buyer’s market.’
  • Nine of ten survey respondents intend to engage a ‘friend in the deal’ — an outside partner — to provide guidance throughout the M&A process; half of all buyers and 40% of sellers are considering partnering with a commercial bank.
  • In late 2013, RBS Citizens conducted a survey of 460 U.S.-based middle market business executives that are open to or currently engaged in some form of corporate development activity, including mergers, acquisitions, and raising capital in the New England, Mid-Atlantic and Mid-West regions. For the purposes of this survey, middle market businesses have annual revenues of between $5 million and $2 billion.
  • The Sellers’ Perspective:

    Based on this year’s survey results, the proportion of current and potential sellers in the market remains unchanged since 2012, but their motivations and intentions have shifted.

    Although just 6% of middle market executives are currently involved in a sale, more than one-third indicate they would be open to a deal if approached by a buyer with a strategic fit.

    While sellers were willing to ‘sell it all’ a year ago, a partial sale — selling an operating asset or division — has become more appealing than selling off the entire organization.
    Being undervalued and underpaid by acquiring firms remains sellers’ primary concern; partial sellers are increasingly concerned about meeting post-acquisition revenue targets.

    The Buyers’ Perspective:

    While fewer acquisitions were in process at the end of 2013 than in the year before, deals this year are expected to be larger and more strategic.

    Less urgency in the market has translated into fewer current deals in process in early 2014 and more potential buyers are ‘on the sidelines’: open to but not actively seeking buying opportunities.

    Buyers are less reliant on M&A as a means of growing; their goals are now more likely to be expanding geographic reach, increasing production and product capabilities and accelerating organic growth.

    Respondents plan to make fewer purchases in 2014 but expect to spend more on each; the majority of executives anticipate spending between $10 million and $25 million.

    The Trusted Advisor:

    Given the complexity of an M&A transaction, from ensuring proper valuation to identifying the best strategic buyers or acquisition targets, the process has become more labor-intensive. Most companies without an experienced internal team are relying on an outside advisor.

    Of organizations that intend to engage external support for their deal-related corporate development needs, commercial banks are the most popular choice, followed by investment banks and business brokers.

    Nearly half (47%) of respondents rate commercial banks as ‘excellent’ in regards to their corporate development capabilities, compared to 35% for investment banks and 26% for both private equity and venture capital firms.

    Valuation, financing, opportunity assessment and due diligence are the areas where these companies are looking for the most help.

    The RBS Citizens Middle Market M&A Outlook, now in its third year, provides an in-depth look into the behaviors, attitudes and perceptions of executives about their corporate development strategies for the year ahead.

    To read RBS Citizens’ entire news release click here.