Last week the Wall Street Journal hosted the Middle Market Network to discuss issues relevant to middle market firms in the US. The good news is that middle market companies are getting healthier. With an increase in M&A activity and a boom in the construction industry, middle market businesses are growing and CEO confidence is high.

However, middle market companies still face challenges due to the global economic environment, disruption from technology, and industry and demographic shifts. Below are some of the issues that were discussed along with our commentary:

1. M&A

Middle market activity in 2016 was strong and we can expect robust activity to continue. Debt financing is still relatively inexpensive and the prospect of tax reform is also an incentive for deals. The demographic shift with baby boomers entering retirement and selling their firms also continues to drive activity.

2. Staffing

About half of middle market firms say a lack of talent at all levels impedes growth, according to Thomas Stewart of the National Center for the Middle Market.

Once recruited, middle market companies also struggle to keep employee engaged and satisfied on the job. Stewart suggests on the job training and collaboration with higher education so students learn the skills necessary for joining the workforce.

Another way middle market companies can fill this gap is by acquiring another company for key employees. Also known as an “acqui-hire,” this practice is commonly seen with technology startups, but can be applied to organizations of any size. In fact, identifying “star employees” is an essential part of due diligence.

3. Succession planning

Many middle market businesses have no plan for succession and those that do often fail to execute them.

Succession plans must be developed long before an owner exits in order to ensure the longevity of a company. It takes time to identify and cultivate individuals that can lead the company. Business owners should consider their goals and if anyone is capable and ready to take over. When no succession plan has been put in place, selling can also be option. For strategic acquirers, this is an opportunity to develop a persuasive offer for the company to sell to you. Determine what factors including, price and personal drivers would make selling to you more attractive how it will meet the owner’s goals.

4. Technology

Automation and technology are here to stay and middle market firms need to grasp this reality and act on it. Unlike large corporations who have the money to invest in the latest technology, many middle market companies have not embraced this change either due to lack of resources of fear from works that they will lose their jobs to robots. Marco Annunziata, GE’s Chief Economist, had a few interesting comments, noting “There will always be a human component” to technology. Whether or not this is true, technology has and will continue to dramatically change business.

Cybersecurity is another major concern and only 45% of middle market companies have an up-to-date defense plan. As the world becomes more digital, many companies find they are ill-equipped to deal with data breaches and the threat of hackers. Middle market companies may think cyberattacks only happen to large corporations like Target and Yahoo!, but the reality is no business is too small for hackers to target.

5. Healthcare

Changes in healthcare policy is a major concern for middle market businesses. 74% of firms attending said it would affect their business. With so much uncertainty, navigating the changes and planning for the future has become increasingly difficult.

 

All companies, even those that are profitable, face pressure from today’s economic environment.  Whether its regulator hurdles, increased competition, geopolitical risk, or new technology, the world today is constantly changing.

Unfortunately, many companies realize this too late and “suddenly” find themselves in an impossible situation that is incredibly difficult to reverse. The best way to avoid this fate is to take a proactive rather than reactive approach to facing business challenges. This way, you can spend the appropriate amount of time preparing your strategy for growth, whether that’s divestment, acquisition, or organic growth, instead of hastily making a panicked decision or naively hoping for the best. While there’s no way to control the macroeconomic environment, companies that thrive are able to anticipate change and craft their own growth strategies rather than letting the market dictate their path forward.

Those of you who are struggling may need take a serious look at your growth options and consider doing something different than business as usual. This may mean boosting organic growth, minimizing costs, exiting a market, or exploring external growth and acquisitions. If your company is in a strong position today now is the best time to build on your strength. Continuously assess market trends and future demand in order to adapt as needed and position your company for long-term growth.

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You don’t have to “go big or go home” to successfully grow your company through M&A. A small, well-executed acquisition that targets a specific need can sometimes be more powerful than a multi-billion dollar consolidation. Let’s take a look at a recent example from the news.

Earlier this month, Conagra announced it would acquire Thanasi Foods out of Boulder, Colorado. Founded in 2003 by Justin “Duke” Havlick, Thanasi is a privately held company with less than $20 million in revenue and sells two products: Duke’s meat snacks and Bigs sunflower and pumpkin seeds.

On the other hand, Conagra is an $11.6 billion company with an established product portfolio which includes brands such as Marie Callender’s and Healthy Choice. So why is Conagra purchasing such a small acquisition? Conagra needs more SKUs, especially value added or “premium” products that will deepen its relationship with customers like Walmart, which is Conagra’s top customer.

Although Thanasi is a small company, its products already have some traction and customer approval in the marketplace. Duke’s and Bigs are sold in 45,000 retail locations and are in fast-growing segments. Depending on how you look at it, Duke’s and Bigs is a compliment or competitor to Conagra’s Slim Jims and David-branded seeds. Essentially Conagra is purchasing a form of proven R&D to run through their pipeline of customers on a larger scale.

Acquisitions don’t have to be huge to be significant. Especially in the middle market, a carefully planned, small, strategic deal can exponentially grow your business and help you reach your goals. Meaningful transactions are those that help your company become increasingly focused and effective, so don’t get too caught up in the numbers.

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There’s a myth that acquisitions are only executed by huge, publicly-traded, Fortune 500 companies, but that’s simply not the true. In reality, there are many acquisitions conducted by small and middle market firms that are private transactions and are not reported to the media.

There are many reasons to consider acquisitions, regardless of the size of your business. A smaller, highly focused acquisition can grow your company and be incredibly profitable. In fact, small transactions allow you to execute your strategy covertly and avoid alerting your competition to your growth strategy. With a small, strategic acquisition there is less of a risk of integration issues and acquisition failure because the deal is not transformative for the organization. At the same time, a small, strategic acquisition can fulfill a targeted growth need and positively impact a company’s long-term growth.

Another reason people don’t consider acquisitions is because they think they are too expensive. While acquisitions do require a significant amount of financial resources to execute, the cost of organic growth or doing nothing may be higher than the cost of M&A. When looking at the bigger picture, it may be more expensive to develop a new product on your own or take too much time. Companies often use acquisitions to move quickly and implement a ready-made solution. If you are concerned about cost, keep in mind there are ways to mitigate the price of a deal. Only you can determine if acquiring or building your own solution is best, but you should consider both options simultaneously.

Whether or not you decide to grow through external or organic growth, you should consider both as tools, regardless of the size of your company. For every company, unintentionally falling into the trap of doing nothing is dangerous. Innovation, either from external growth or through in-house development, is key to long-term success. Think about companies that lost their edge do to failure to innovate. Blockbuster didn’t adapt from DVD to streaming and lost out to Netflix and Redbox and the once dominant BlackBerry, which failed to compete with iPhone. The cost of unintentionally doing nothing can mean your services and products become obsolete, so make sure you consider your next steps with the future in mind.

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Capstone Strategic’s survey of middle market executives shows most see the same (43%) or growing (31%) M&A activity in their industry. 47% are pursuing M&A in order to access new markets.

Capstone Strategic, the leading M&A advisory firm for the middle market, surveyed middle market executives from multiple industries on their growth and M&A experience in 2016 and their outlook for 2017. The survey was conducted in December 2016 and followed previous annual surveys of the middle market.

M&A activity across the board is mostly seen as the same (43%) or growing (31%).

Looking forward, our respondents are evenly split on whether or not they will pursue M&A in 2017. 35% are less than 50% likely to execute acquisitions and 35% are more than 50% likely. The top driver for pursuing M&A this year is access to new markets (47%).

As for obstacles to M&A, time and attention demanded by the process is the top barrier to pursuing acquisitions in 2017 (25%) while the most common reason for not considering M&A as a tool for growth is lack of appropriate target companies (28%).

The overall growth picture is improving. Those reporting modest growth rose from 58% in 2015 to 67% in 2016 and those reporting high growth grew from 11% in 2015 to 13% in 2016. Those reporting contraction shrunk from 9% in 2015 to 5% in 2016.

The business environment is seen by most in a positive light, with the majority reporting the same (50%) or an improved (35%) environment for growth. Compared to 2015, fewer executives saw a worsening environment for growth (8% compared to 13%).

Capstone’s CEO David Braun said: “The survey confirmed that 2016 remained an active year for middle market mergers and acquisitions and looking ahead, we believe we’ll see begin to see a renewed interest in M&A activity due to pent up demand and supply in the marketplace. 2017 presents a unique opportunity for companies that decide to execute strategic acquisitions.”

The full survey, State of Middle Market M&A 2017, can be viewed by clicking here.

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Middle market M&A rose in October and dealmakers expect robust activity for the remainder of 2016, according to a survey by Mergers & Acquisitions. Survey participants expect more companies will be inclined to execute deals once the uncertainty of the U.S. presidential election has passed.

Overall M&A in 2016 has dropped significantly when compared to 2015 activity. US M&A value for the first nine months dropped from $1.53 trillion in 2015 to $1.07 trillion in 2016 (-30%) and the number of deals dropped from 9,028 to 8,103 (-10%), according to Thomson Reuters.

However, middle market M&A has remained relatively stable. For the first nine months of 2016 US middle market M&A value decreased just 3.5% from $155 billion to $145 billion and the number of deals decreased from 7,565 in 2015 to 6,935 in 2016 (-8.3%), according to Thomson Reuters.

As I previously discussed on this blog, now may be an ideal time for middle market companies to execute strategic mergers and acquisitions. While mega-deals are slowing down and large corporations shedding non-core business lines, there are many opportunities for middle market companies to take action. External growth, which includes joint venture, minority interest, majority interest and 100% acquisition may help your company grow for years to come.

Are you ready for M&A? Take the Acquisition Readiness Assessment now for free.

Fill out the form below to access take the assessment online.

 

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The Guideline Public Company (GPC) Method is one of the more popular valuation methodologies because people often hear about it in the news or in presentations. This method identifies prices for individual shares of publicly traded companies that are subject to the same industry dynamics as the subject company (the company you are trying to value).

The valuation multiples calculated from these companies provide an indication for how much a current investor in the marketplace would be willing to pay for similar situated company that we are trying to value. For comparison sake we might be looking at things like similar businesses, sizes, geographic regions, and other operating characteristics.

Is the GPC Method Appropriate for Middle Market Businesses?

Depending on the size of the subject company, using the GPC method can be hard to implement realistically. Many middle market companies are better suited for the completed transaction method or the Discounted Cash Flow (DCF) approach. However, for some industries such as cloud or information technology, GPC data can be very robust and indicative of what’s going on in the industry, even for smaller-sized companies.

Selecting Guideline Public Companies

There are a number of resources both paid and free that we use to identify guideline companies.

  1. Cap IQ – This is a paid resources that provides research and analysis on publicly traded companies and overall market awareness. You’ll be able to use the Cap IQ database and tools to identify a list of companies that are similar to the one you are trying to value.
  2. Securities and Exchange Commission – The SEC has a search tool called EDGAR that allows you to search by industry code and provides a list of all public companies that characterize themselves as being in that industry. This typically generates a lot of results which you’ll need to narrow down in order to make sure the public companies are really comparable to the subject company.
  3. Yahoo Finance / Google Finance – These online tools provide key data on publicly traded companies. Once you find a few good comps for your subject, you can look up their competitors on Yahoo or Google Finance and start developing your list of GPCs that way.

How Many Companies Do You Need?

For a good GPC you need at least five public companies in your comp set; we prefer to have at least 10. It provides for a lot more analysis for the range of industry multiples. I’ve seen as many as 30 companies used, but bigger is not necessarily better. When using the GPC method, you really have to ask, “Is the subject company really comparable to these public companies?” And if this causes you to whittle down your comp set to five or six companies, that’s fine.

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Middle market companies have faced many challenges to growth, but the tide is now turning. Previously, we had observed the dumbbell effect, where at either end of the spectrum massive corporations and small businesses flourished while middle market companies were caught in between. Unlike large multinational corporations, many middle market companies cannot leverage the same economies of scale to deal with price cuts, consolidation, and regulatory challenges. On the other hand, middle market companies do not have the same flexibility as startups to move swiftly in the market.

The Dumbbell Effect

The Dumbbell Effect: Massive corporations and small businesses flourish at either end of the spectrum, while the middle market is squeezed in between.

 

Corporations Sell Non-core Businesses

While this environment was challenging, it also created a unique opportunity for those who could seize opportunity and fill the void. Now the market has shifted and instead of consolidating, many large corporations are shedding non-core businesses in order to focus on fast-growing, profitable business units. P&G is in the process of selling 105 brands to refocus on 10 fast-growing category-based business units. Recently P&G sold Duracell to Berkshire Hathaway, various hair care brands including Pert, Shamtu and Blendax to Germany’s Henkel, and its fragrance, color cosmetics and hair color business to Coty.

Growth Through Strategic Acquisitions

Divestments by large corporations can generate opportunities for middle market companies looking to grow rapidly through M&A. With acquisition, middle market companies have the opportunity to quickly execute their growth strategy, whether it’s by adding a new product or service, acquiring a competitor, or expanding into a new geographic or vertical market. Overall, middle market M&A has remained relatively stable when compared to global values, suggesting that although mega-deals may be slowing down, smaller, strategic acquisitions are still being executed. Now is the time to carefully consider your opportunities and execute your growth strategy.

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Middle market deal activity reached its lowest level since 2009, according to Mergers & Acquisitions. This may be a result of concerns about the upcoming U.S. presidential election and because banks are shying away from lending to private equity-backed deals.

While middle market M&A activity is down, when compared to 2015 levels, the middle market as a whole is actually leading the U.S. economy in revenue and job creation. According to the Middle Market Indicator, the middle market grew at a rate of 6.3% over the past twelve month while the S&P 500 growth rate was -3.4%. The projected twelve month growth rate is 4.6% for the middle market.

So how should an owner or executive see this paradox? In a word: opportunity. With continued strength in the middle market, but a decline in deals, you have the chance to move more freely than when M&A is hot.

If other companies are paralyzed by uncertainty, you should be emboldened. Seize the opening to pursue transactions while competition is reduced.

M&A can be the best way to own the future, by claiming new market share, adding new technologies, enriching your brand, or expanding your human resources.

But where to begin?

Your first step is to review your current market and identify predictors for future demand. What are your customers buying today? What will they need tomorrow? You probably have an approximate idea but now is the time to conduct thorough research, so you can spot the gaps that your company could fill.

The next step is to consider how strategic acquisition could position you to meet future needs faster than organic growth.

Especially if you have a strong balance sheet, right now is an exceptionally opportune time to accelerate your growth through mergers and acquisitions. So make a plan, and then act.

Capstone’s survey of middle market executives shows 53% likely to pursue mergers and acquisitions in 2016 compared to 41% when last surveyed.

Capstone surveyed middle market executives from multiple industries on their growth and M&A experience in 2015 and their outlook for 2016. The survey was conducted in December 2015, and followed a previous survey in 2014.

Respondents gave a mixed picture of growth for their industries in 2015. More respondents saw extremes in their industries. Those reporting high growth grew from 4% in 2014 to 11% in 2015, while those reporting contraction grew from 2% in 2014 to 9% in 2015. Between these two poles, most respondents were seeing modest growth in their industries during 2015 (58%).

How likely is it that your company will pursue some form of M&A or external growth in 2016?

How likely is it that your company will pursue some form of M&A or external growth in 2016?

The environment for growth in 2015 was seen by most in a positive light, with the majority reporting the same (46%) or an improved (36%) environment.
M&A activity across the board in 2015 was mostly seen as the same (36%) or growing (33%) when compared to 2014.

Looking forward to the coming year, companies showed a stronger inclination to engage in M&A, compared to predictions when we last asked this question in 2014 (53% certain or likely, compared to 41%).

When asked about their growth goals, respondents were evenly split between “selling current products in new markets” (40%), “creating and selling new products in current markets” (36%), and “increasing sale of current products in current markets” (38%). (Some respondents were pursuing more than one goal).

As for barriers to engaging in M&A, these were largely internal, with respondents citing “lack of resources” (33%) as a primary reason not to pursue transactions.

Capstone’s CEO David Braun said: “This survey confirms what we ourselves observed, that 2015 was an active year for middle market M&A and 2016 is likely to prove an even stronger year. We see a growing polarization between growth-focused companies and those that are sitting on the sidelines. While many companies are still holding cash, more players are emboldened to expand through external growth. This includes acquisitions but also minority ownership deals, joint ventures and strategic alliances. When growth stagnates, M&A can often provide the fastest path forward. When growth is high, companies should seize the opportunity to plan for further expansion.”

The full survey, State of Middle Market M&A, can be viewed by clicking here.

In light of recent FTC rulings against market domination, Sysco has changed its M&A strategy to focus on smaller, strategic deals rather than large transformative deals. Although Sysco’s change is motivated by regulatory obstacles to larger acquisitions, using strategic, smaller deals is an excellent approach from a strategic perspective. We have long recommended that our clients pursue a series of small transactions to achieve their long-term growth goals. We call this strategy taking “frequent small bites of the apple” because it’s much easier to eat an apple one bite at a time than to cram the whole fruit into your mouth!

Among the advantages of pursuing a series of smaller deals:

1. Focus on One Reason

You may have many needs to meet before you reach your long-term growth goals, for instance improving talent and technological capabilities and expanding geographically. If your vision is growing into a worldwide paint manufacturer and distributor, but you only have manufacturing operations on the East Coast, you will need to expand geographically, build your distribution networks, and perhaps improve on your manufacturing capabilities. Doing all this with only one company may dilute your efforts, or you might acquire a company that really doesn’t fulfill any of your strategic needs.  A better approach: first focus on acquiring a company with an excellent distribution network in the U.S and then another company with quality manufacturing capabilities that match your acquisition criteria. Once you’ve adjusted to this change, you might look at acquisitions outside the U.S.

2. Stay Below the Radar

Large transactions draw attention, especially the mega-deals valued at over $5 billion that have boosted M&A value to record levels. But many transactions are much smaller than these multi-billion dollar deals; in the U.S. from November 1, 2014 to October 31, 2015 there were 12,663 M&A transactions, according to Factset data. 95% of these deals were under $500 million or undisclosed. (Undisclosed deals are typically privately held, smaller transactions that are too small for financial reporting). Smaller strategic transactions allow you to make moves below the radar, out of sight of your competition.

4 reasons why smaller acquisitions are better

3. Adjust to Integration Challenges More Easily

Even the most carefully planned acquisition encounters integration challenges as people and systems adjust to the newly merged company. By acquiring a smaller company, you dramatically limit your integration challenges. Once you’ve had time to work out any kinks and make sure your new company is operating smoothly, you can begin pursuing the next acquisition.

4. Minimize Risk of Acquisition Failure

Although acquisitions are inherently a risky undertaking, smaller strategic transactions are much less risky than large transformative deals. Because integration challenges are minimized, you can remain focused on your strategic objectives, increasing your chances of realizing synergies from the deal. There’s also less financial risk associated with smaller acquisitions; you can minimize capital outlays while rapidly growing your company to reach your long-term goals.

Executing a series of strategic acquisitions is a proven way for middle market companies to grow.

A small deal is also ideal for first-time acquirers who have never pursued growth through mergers and acquisitions. All in all, smaller acquisitions allow you to remain focused, move covertly in the market, and increase your chances of success while still rapidly moving you closer to your vision for the future.

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Instead of investing in growth, companies this year have been holding more than $1.4 trillion in cash – close to a record $1.65 trillion in 2014. Oracle’s $56 billion cash stockpile is 1.5 times its sales and Cisco’s $60 billion in cash is 1.2 times its sales. Eleven companies have cash reserves double their annual revenue.

And it’s not just Fortune 500 companies. According to the Middle Market Center, more middle market firms plan to hold onto cash in 2016. Fewer of them are willing to invest extra money or plan to expand in 2016.

Have U.S. Companies Stopped Investing In Growth?

Companies that stockpile cash don’t invest in stock buybacks and dividends, research and development, other organic growth initiatives or mergers and acquisitions.  A strong balance sheet is important, but the levels of cash held by nonfinancial S&P 500 companies is astounding!  They may be worried about the economy or the upcoming elections. But there’s another possibility: all that money on the sidelines portends robust M&A activity in 2016.

Tax Savings

Publicly traded companies also are stashing profits offshore to avoid paying taxes on them. The U.S. corporate tax rate is one of the highest in the world and tax inversions in particular are being driven by the pursuit of tax savings rather than for strategic reasons. .

The latest example is Pfizer and Allergan’s proposed merger which would relocate the company to Ireland and away from the U.S. corporate tax rate. Other companies that have done this include Chiquita, Perrigo, Medtronic, Endo, and Actavis despite calls for stronger restrictions on tax inversions by Congress and President Obama. Pfizer already has found ways to save on taxes even without the acquisition. The company has designated $74 billion as “indefinitely’ invested abroad.

Invest in Growth Now

As other companies hold onto cash, you have a unique opportunity now to invest in your future. Do this by developing a long-term strategic plan, investing in new products, services or equipment, or growing organically. Or pursue the faster, more powerful vehicle of strategic mergers and acquisitions. Middle market companies can seek privately held, not-for-sale deals that focus on long-term growth rather than on cost savings or short-term quarterly updates with shareholders. This increases the likelihood of a successful transaction and sustainable growth.

Middle market companies cannot afford to dwell on cost savings and sit idle. Make sure you are thinking about long-term growth and how your company will not only survive, but thrive.

Is your company hoarding too much cash? Or are you investing in future growth?

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As we near the end of the fourth quarter, everyone is wondering what will happen in 2016. Will the frenzied M&A activity of 2015 continue into the new year?

There seem to be mixed reviews on what activity will look like next year. The Intralinks deal flow predictor indicates a 7% increase in global M&A in Q1 2016, but Mergers & Acquisitions Magazine has been citing a downward trend in the middle market for the past few months.

On the other hand, on a recent Deal Webcast “2016 Middle Market Outlook,” dealmakers were a bit more hopeful, expecting to see activity continue due to the high levels of dry powder and capital on the sidelines, while they did admit there may be a slight downturn.

The lending environment will be similar in 2016 to what it was in 2015 and in the middle market private equity will continue to be highly competitive, according to Michael Fanelli of RSM.

Healthcare and Technology Will Dominate

The Affordable Care Act brought about widespread changes to the healthcare industry, spurring a wave of mega-mergers by massive pharmaceutical companies. Despite this wave of mega-deals, for the most part much of the uncertainty surrounding ACA seems to have worked its way out of the middle-market companies. Tim Alexander of Harris Williams says that by and large, healthcare has become less of a due diligence item for dealmakers, especially those in the upper middle market.

On the other hand, in the lower middle market, the ACA may still raise some red flags, especially for businesses with part-time employees or ones that don’t have healthcare plans at all. While some sellers may have thought about the impacts of ACA, many are waiting to begin talks with a buyer before engaging professionals to deal with these issues, according to Fanelli.

The focus on healthcare is not only due to changes brought about from the Affordable Care Act, but is also indicative of a larger health and wellness trend we’re seeing in the U.S. Expect shakeups in the consumer and food and beverage spaces as people focus on healthier, organic specialty products.

As for technology, there’s plenty of disruption that will continue over the next one to two years, with a constant flow of innovative startups. This continuing trend will have its own impact on the middle market.

The U.S. Middle Market Remains Strong

For the most part, all three dealmakers agreed that middle market M&A is much stronger in the U.S. than it is cross-border or internationally. Most investors see the U.S. as the locale where they can expect their highest returns. This regional focus is not unique to the middle market: In the first 9 months of 2015, the U.S. accounted for 47% of global M&A transactions ($1.5 trillion).

Engaging with Sellers Remains Critical

When it comes to deal-making, building a connection with the owner and sharing your strategic vision remain the critical starting points. There are numerous reasons why an owner may decide to go with a financial buyer over a strategic buyer, even though technically strategic buyers should have an advantage from a cash perspective. In our experience, the same has been true (less money for strategic acquisition vs. financial). What it comes down to is really understanding the owner’s priorities and what he or she wants out of an acquisition. Hint: It’s not always more money.

As Marc Utay of Clarion Capital Partners said, echoing one of our key principles: “Price is important, but not the most important thing. It [the company] is like a child to them.”

 

The pharmaceutical and healthcare industry shows no sign of slowing down in terms of M&A and consolidation. There have already been $427 billion in transactions according to Dealogic data.

Last week Pfizer and Allergan announced that they are currently in merger talks to form one of the largest pharmaceutical companies in the world. Certainly one motivation for the deal is to capitalize on lower tax rates outside the U.S. Allergan is based in Ireland and is  expected to enjoy a tax rate of just 15% this year compared with U.S.-based Pfizer’s rate of 25.5% last year. Of course, this wouldn’t be the first tax-incentivized merger we’ve seen in healthcare.

Meanwhile, Walgreens and Rite Aid plan to combine in a $9.4 billion acquisition — another mega-deal to fuel the fires of M&A activity in 2015. If the acquisition moves forward the new company would own 128,000 drugstores, consolidating two of the three largest drugstores in the U.S.

Big Healthcare Gets Bigger

These large mergers and acquisitions illustrate a phenomenon that I’ve been talking about for quite some time: what I call the “dumbbell” effect. At one end of the dumbbell, large corporations continue to size up, and at the other end small mom and pops and startups are flourishing. In between, middle-market businesses are getting squeezed.   The dearth of smaller, middle-market companies is easy to identify in the retail space, where it’s visibly more challenging for independent outfits to survive.

For example, in the restaurant industry, it’s increasingly hard for independent players to afford the costs of commercial leasing as chain restaurants exploit the economies of scale and their sheer purchasing power.. In some ways it’s similar for the healthcare industry, where the flurry of deal activity is about consolidation, purchasing power, retail leases, and the most favorable contracts with retailers and insurers. Smaller companies are also under enormous pressure to deal with the cost of complying with regulations.

The big pharmacy mergers are mostly about grabbing market share on both the West and East coasts. Walgreens and Rite Aid both have a strong presence in California and New York and Massachusetts, while CVS’s acquisition of Target Pharmacy strengthens its presence in the Pacific Northeast.

Whatever the appearances, Walgreens is using its acquisition of Rite Aid to ensure the company is large enough to compete in terms of distribution, channels, and customers. When compared to CVS, Walgreens isn’t huge ($76.4 billion in 2014 revenues vs. $139.4 billion 2014 revenues). Even at that scale, it’s becoming more difficult to be the smaller player simply because of the burden and cost of regulatory compliance and ensuring that you have the right healthcare plans, contracts and exchanges to remain competitive.

Advice to Middle Market Companies

In the current climate, my advice for middle-market companies is this: Figure out how to continue growth by whatever means necessary. You’ll probably have to do something different than simply grabbing market share because you don’t have the resources of a a huge publically traded company. A strategic use of acquisitions can be a smart way around this dilemma. What’s certain is that if you don’t take action you risk becoming a “me too” player, or simply obsolete.

Wherever there is a challenge, there is also an opportunity to think outside the box and differentiate yourself – whether it’s in terms of service, technology or something else unique to your business. Middle-market companies have one key advantage: the freedom to be agile and offer new, insightful solutions for their customers in ways that large corporations can’t. Keep your growth strategy top of mind as you think about your company’s plans for 2016 and beyond.

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There’s no denying it that M&A is on fire. Look at any financial newspaper headlines and you’ll see announced deals or merger talks. And keep in mind for all the major transactions involving publicly held companies there are many smaller, privately held transactions occurring unannounced.

We can better understand this current wave of activity and what it means for you if we review historical M&A.  Of two similar spikes in M&A, in 1998-2000 and 2005-2007, the first was primarily driven by Y2K and the dot-com era (or error, depending how you look at it!). This period, though it was marked by a significant burst in activity over a short time, was really an anomaly in the marketplace. It dropped off and certainly wasn’t helped by the events of 9/11.

US M&A activity from 1994 through  Q1 2015

We can better understand today’s robust M&A market by taking a look historical mergers and acquisitions.

M&A activity slowly ramped up until we reached the second peak in 2007 when inexpensive money was readily available. If you think back to 2007, there were a lot of similarities between corporate mortgages, corporate M&A, and the residential mortgage meltdown. The following years were slow for the economy and not surprisingly for acquisitions as well. M&A has a strong correlation to the equity market, although the equity market has done fantastically well since 2009 while M&A remained relatively flat until 2014, when we saw an uptick in activity.

Now there is pent-up demand for acquisitions and we’ll likely continue to see an increase in M&A activity throughout 2015.

Here are some trends to take note of today:

1. Mega deals, transactions over $5 billion, are now back in vogue.

Comparing this year to last, you’ll notice the number of deals has remained relatively flat while the dollar value of deals has increased significantly. In the U.S. for the month of May, the number of deals actually decreased from 939 in 2014 to 903 in 2015. However, the deal value increased to $261.2 million (according to FactSet Data)

2. Banks are more aggressive about lending.

With so much cash in the market, banks are now willing to take on more risk to secure more business. Banks are competing for attention from buyers and are offering attractive loan packages. We are starting to see more covenant-light transactions.

3. Companies still have record amounts of cash on their balance sheets.

Both individual companies and private equity firms now have readily available funds that can be used to pursue acquisitions.

With these ingredients in place, the M&A market remains robust.

What This Means for You

You may think that overall M&A market trends will not impact you, but I can tell you with a high degree of certainty that they will. Every industry will be affected, one way or another, because M&A is both a reflection and a source of business sentiment, and it influences market dynamics in multiple ways. You can be a passive observer or an informed observer. Or you may even choose to be an informed participant. Regardless, I encourage you to take stock of the fact that M&A is causing changes in your industry.  Deal-making may even accelerate in the next few months in industries such as telecommunications, healthcare, and oil and gas. Whether or not you choose to act, of course, is up to you.

Capstone’s State of Midmarket M&A Q1-Q3 2014 Update indicates a steady growth in midmarket mergers and acquisitions.

We surveyed midmarket executives from multiple industries to learn how the first nine months of 2014 matched expectations from 2013, and to indicate any new trends in midmarket M&A. The survey was conducted in October 2014, and follows a similar survey conducted in December of 2013.

Midmarket M&A activity continued to increase despite economic uncertainty. More than half of the respondents (60%) engaged in M&A or external growth activities in 2014 and 44% are considering M&A in the last quarter of 2014.

Of the midmarket executives polled, 64% reported “modest growth” in their industries compared to 62% in 2013. “High growth” responses dropped by half from 8% to 4%. Perhaps most significantly, 24% of respondents reported stagnation in 2014, double the amount reported in the same period last year. This holding pattern may indicate continued anxiety about the economy, the political environment and government regulation.

David Braun, Capstone’s founder and CEO, noted, “As organic growth opportunities remain modest or stagnant, executives are continuously looking for new ways to grow, including mergers and acquisitions.”

While midmarket executives seem to be showing a renewed interest in M&A, they acknowledge there are hurdles to embracing external growth. Lack of time, people and money continues to be the greatest barrier to pursuing mergers and acquisitions with over half (52%) reporting insufficient resources as their biggest challenge. Insufficient resources also topped the 2013 chart (54%). 24% of those surveyed also said slow decision-making continues to be a hurdle.

In 2014, the same percentage of executives as in 2013 (28%) reported that they were concerned about the lack of suitable companies to purchase. About this Braun said, “It may be difficult to find suitable companies to acquire among those that are offered for sale. Restricting your search to for-sale opportunities is usually a mistake. At Capstone we encourage clients to expand their search and actively pursue not-for-sale acquisitions.”

Based on its survey and firsthand contacts with the market, Capstone predicts the economy will continue to recover, and as it does more midmarket companies will seize on the opportunities presented by external growth.

Braun said, “External growth embraces any strategy that leverages a relationship with another company, including strategic alliances, joint ventures, minority interest and acquisitions. When it comes to pursuing an acquisition, here’s one principle we’ve learned from years of experience: They are all for sale…for the right equation.”

The full survey, State of Midmarket M&A: Q1-Q3 2014 Update can be viewed at www.SuccessfulAcquisitions.net/report.

For the last couple of years, corporate America seems to have been playing it safe when it comes to growth. Currently U.S. corporations are holding on to a record $1.65 trillion in cash.

Are you in a similar position, perhaps? Cash may not be your “security” blanket but you may be unwilling to take the risks needed for growth.

Based on my daily interaction with midmarket companies, I would advise you to be proactive about your business growth. Failing to do so allows your competitors and the market to control your future. What good is cash if you don’t use it to grow your business?

Fortunately, it seems that some U.S. businesses are getting off the sidelines and putting their money to use. Many are investing in mergers and acquisitions, according to a report by the Association for Financial Professionals. In fact, this is the first year-over-year decline in cash reserves since 2011.

This trend reflects a growing confidence in the U.S. economy and it also demonstrates a profitable way to use cash rather than just letting it sit around.

But what about your company? Are you “playing it safe”? It’s not too late to take a proactive, strategic approach to growth. Here are four suggestions for putting your money to work rather than hoarding it:

  • Mergers and Acquisitions – Use M&A to grow quickly. Add a new customer base, enter a new market, or gain a new technology or capability. The core benefit of acquisition is that you have a ready-made solution you can use on day one, without building it yourself.
  • Stock Buybacks – Public companies will use excess cash to repurchase their own shares if they believe the price is undervalued. While stock buybacks don’t create any real growth for the company, they increase the earnings per share and can be a tax-efficient way to distribute earnings to investors.
  • Research and Development – For some, organic growth is a better pathway than M&A. Invest in the future: What will your customers want in a year from now and in 10 years? Use your money to develop new products and services. See how you can be best positioned for future growth.
  • Plant and Equipment Upgrades – Updating your physical assets can help you become more efficient, reduce costs, improve your services, and prepare for future growth. For example, upgrading plant equipment might improve safety and reduce down-time caused by accidents. Upgrading your software might allow you to process more orders per employee and build for scale.

Whatever course of action you decide to take, don’t sit on the sidelines or cling to a false sense of security. If you’re not growing you’re dying.

*This post was originally published on LinkedIn

With a 70% failure rate for acquisitions, it seems like the odds are against you from the beginning. Before you get scared off, however, let’s take a closer look at what that 70% means.

The 70% failure rate is mainly based on large, publicly traded transactions because large transactions must be reported to the SEC, and information on public companies is generally available. In addition, these large transactions tend to make the news more often since people are fascinated by massive deals involving well-known brands.

Despite this focus on large acquisitions, there are hundreds of smaller, unreported transactions involving middle-market companies and privately held businesses.

We call these types of deals “taking small bites of the apple.” Instead of huge, transformative deals, which tend to be a bit difficult to swallow, smaller, strategic acquisitions achieve a higher rate of success.

Acquisitions are a powerful tool for sparking growth and may be the only way for you to reach your goals. Acquiring smaller companies does not completely eliminate your risk, but conducting multiple, smaller acquisitions, enables you to take manageable steps to executing your growth strategy.

As with any business initiative, you must take some risk to reap the rewards. Following a carefully planned strategy and a proven process will help minimize your risk and optimize the success of your acquisition.

Mergers have hit a seven year high.  While deal value is up 73 percent, the number of deals has decreased 0.4 percent, according to Reuters data. This confirms what we’ve been seeing since last year: larger, fewer transactions. With mega deals on the rise, we will likely see more activity in the middle market as confidence levels improve and executives become more likely to pursue acquisitions and execute deals.

Photo Credit: joiseyshowaa via Compfight cc

A minority of investors have expressed concerns that midmarket activity may actually slow down in 2014, compared with 2013 activity levels.  Growth in the middle market may plateau for a few reasons all of which hinge on uncertainty in the economy including sequestration and the ongoing open-discussion over the U.S. debt ceiling. Health-care reform costs and talent gaps may also contribute to a slowdown in 2014.

According to a survey conducted in Q3 2013 by the National Centre for the Middle Market (NCMM), middle-market companies (generating between $10 million and $1 billion), in revenue can expect slower expansion over 2014 as revenue and employment growth are expected to slow over the next year.  This quarterly survey took responses from 1,000 C-level executives. The responses showed that on average revenue is expected to grow at a lowered rate of 4.4 % through the next year compared with the 5.1 % estimated from the previous quarter. Additionally, only 61 % of the middle-market executives surveyed said they would invest an extra dollar if presented with that opportunity as compared with 64 % last quarter.  Furthermore, the survey found that hiring among midmarket companies is expected to grow only 2.1 % over the next year, a drop from the 2.5 % predicted last quarter.

This post is part of a series addressing current and expected viewpoints on M&A from across a number of professionally relevant sources. 

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