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The 8 Biggest Trends Shaping M&A

While much of the financial industry has undergone significant development over the last two decades, M&A is one area of finance that has seen particularly robust evolution, especially in recent years. In fact, M&A activity has skyrocketed—increasing by a factor of four times in the past twenty years —and the M&A community has expanded accordingly.

Alongside this development, several key changes to the industry have surfaced. Here is an overview of the significant trends that changed the M&A environment and that will continue to do so:

  • Smaller Firms Embrace M&A. Previously the province of large companies, M&A is increasingly a sought-after option for closely-held mid-market enterprises in the $20 to $100 million range. To further growth, these smaller firms have followed the example of their larger brethren, many of which have active acquisition programs. In addition, instead of being an obstacle, mid-market lenders have become more accepting of their clients buying companies, thus facilitating deals.
  • Private Equity Gained Prominence. The amount of capital raised by the private equity industry for leveraged buyouts has increased exponentially. Private equity is a far more significant player in the M&A business than it was 20 years ago, and it accounts for upwards of 15% of transactions.
  • International Deals Are More Common. Like other facets of American business, M&A has gained international acceptance, particularly in the developed economies. In particular, mid-market M&A activity between the U.S. and Western Europe has exploded, and Focus, my investment banking firm, includes foreign buyers or sellers on every target list.
  • Emerging Markets See More M&A. In recent years, M&A activity in (and between) emerging markets, such as China and Brazil, has grown. Such transactions represent about 15% of global deals now, up from just a few percentage points in the 1990s.
  • Natural Resources Drive Mergers. To complement traditional exploration programs, natural resource companies have ramped up acquisitions as a means to gain additional mineral or energy reserves at a reasonable cost. Many participants see buying reserves in this manner as a fast-moving, risk-adverse alternative to the often speculative option of drilling underground.
  • Expansion of the Internet. The Internet has made the M&A search and contact process easier for both buyers and sellers; and, thus, has facilitated a rise in transactions. This ‘discoverability’ has stimulated activity, and it also has created a more competitive environment for deal professionals. Smaller businesses are no longer limited to complete M&A transactions with local peers.
  • Increase in Computing Power, Coupled With a Decline in Cost. Information related to prospective deals, their pricing and their financing structure can be sliced and diced in numerous ways. This allows industry participants to quickly size up likely scenarios. As a result, private equity firms and corporate acquirers review many more deals on a monthly basis than they did 20 years ago.
  • Rise in Activist Investors. After a long hiatus, activist investors, such as Carl Icahn and Dan Loeb, have raised huge funding war chests. They stimulate M&A activity among publicly-traded companies, encouraging those considered “undervalued” to sell themselves or conduct spin-offs. Publicly traded companies represent a small subset, perhaps 3%, of the deal universe, but they tend to involve the larger, more publicized transactions.

These trends have ramped up transaction volume, yet, on closer inspection, the methodical process needed to produce a successful M&A deal has changed little over the past 20 years. Searching, pricing, negotiating and closing skills remain fundamental elements of success. To optimize results, many buyers and most sellers hire advisors to help them along the way.

The acceptance of an acquisition as a value-creation tactic is embedded in today’s business culture, and deal making, while cyclical, shows no sign of abandoning its secular advance.

Note: Jeff recently authored a new book, M&A: A Practical Guide to Doing the Deal. You can purchase it here.

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