Middle-market companies seeking growth or liquidity have fueled a strong mergers and acquisitions market in recent years and expectations remain high for this year, but Citizens Commercial Banking’s annual survey found many companies see a slowdown on the horizon.

The survey of 600 companies nationwide found that as valuations hover at record levels, sellers are coming to market while buyers continue to search for good opportunities. Favorable overall economic conditions – an expanding economy, a supportive regulatory environment, beneficial corporate tax policies and still-low interest rates – have fueled an active deal environment, according to survey respondents.

The survey indicates a strong correlation between economic outlook and M&A activity with nearly 80% of respondents saying a strong economy invigorates their appetite to pursue either a sale or acquisition, depending on their situation.

However, respondents are feeling an increased sense of urgency because almost half of companies anticipate an economic slowdown in the next two years.

“Many companies see the economy at a mature point in the cycle and so both buyers and sellers may begin to accelerate their M&A strategies – a process that can take a year or more – to get ahead of an upcoming slowdown,” said Ralph M. Della Ratta, head of M&A Advisory, Citizens Capital Markets. “There is reason to believe a slowing economy would support a high level of M&A activity. Many buyers have retreated from the current market based on premium valuations, and their interest would likely be revived if and when pricing eases. For sellers, a more pronounced slowdown presents a conundrum. Act now or they could be faced with the reality of putting their exit strategies on hold until market conditions rebound, and hoping that company performance holds up in the meantime.”

Other key findings of the eighth annual M&A outlook include:

  • • Sixty-two percent of potential sellers are either actively engaged in an M&A transaction or are open to one in 2019 – a sizeable increase from the previous two surveys
  • • Sellers show a high level of interest in international deals with 52% saying they would consider an international buyer with the hope they would retain the current leadership team, provide access to global markets and pay a higher price
  • • Even sellers see M&A as a growth strategy, particularly with regard to divestitures: more than half of sellers surveyed indicated a primary interest in selling either a piece of their core business or a non-core asset or division
  • • Despite high multiples, the majority of buyers see prices rising in 2019, while sellers are evenly split between expecting stable valuations versus higher valuations
  • • Seventy-one percent of potential buyers are either actively engaged in an acquisition or open to pursuing one this year. It’s clear, though, that premium valuations and strong competition for deals, prevalent themes for the past several years, are tempering demand. At the outset of 2018, 79% of potential buyers were actively engaged in or open to pursuing an acquisition, and in 2017, that number was 84%.
  • • Still, a majority of potential buyers remain actively in pursuit of M&A-driven growth with 80% of potential buyers surveyed either extremely or modestly confident of completing a deal in the next 12 months.
  • • Buyers show a strong preference for sellers who engage an advisor, with two-thirds of potential buyers indicating that it is helpful to the process. Buyers believe advisors help keep negotiations at a professional level.

The Middle Market M&A Outlook 2019 was fielded in November and December 2018 to C-suite executives at U.S. companies with annual revenue from $50 million to $3 billion.