NEW YORK Feb 12 U.S. middle market businesses, at last seeing top-line growth spurred by a strengthening economy, are increasingly focused on strategic sales and acquisitions in 2014, with an emphasis on protecting current gains and investing in future growth, an RBS Citizens survey of more than 450 business owners and executives found.
More companies are approaching M&A activity as a path to expand distribution, increase production, gain access to new markets and drive efficiencies, not only as a method to increase revenues, according to the report published on Tuesday.
Survey results show this emphasis on investment in core platforms as a shift away from M&A as a means to supplement anemic organic growth or to unload assets at high multiples.
The firm surveyed business owners and executives at companies with between $5 million and $2 billion in annual revenues in the New England, Mid-West and Mid-Atlantic regions.
The Middle Market M&A Outlook 2014 report found a drop, to 17 percent from 24 percent, in the share of companies currently involved in an acquisition, while showing a fundamental change in the rationale for pursuing a sale or acquisition.
"Corporate buyers in 2014 are being very strategic in their decisions," Bob Rubino, executive vice president and head of corporate finance and capital markets for RBS Citizens Financial Group, told Thomson Reuters LPC. "We are seeing buyers make acquisitions to augment their product offerings, expand their geographic reach, or increase capacity to serve existing clients who are now experiencing higher organic growth rates."
In a recent example, British-based medical technology company Smith & Nephew Plc last week said it would acquire Austin, TX-based ArthroCare Corp, a medical device company, for $1.7 billion. Smith & Nephew said the addition of ArthroCare's technology and products would strengthen its sports medicine business. The combination would also allow Smith & Nephew to cross-sell the joint portfolio across its established global network, as well as to bring ArthroCare's products to new markets and customers.
The more certain economic setting and relatively quiet political climate means executive decision-makers are compelled more by long-term business goals and strategy than a price is right mindset, the report said.
Pure timing is also less of a driving factor. In contrast, in 4Q12 a year-end push ahead of 2013 tax law changes brought a wave of M&A transactions.
This sentiment shift is reflected in the appeal of partial sales -selling an operating asset or non-competitive division for strategic reasons - over selling the entire company. Selling underperforming units allows businesses to focus on bolstering or developing core operations.
"Now, with increased economic confidence on the back of a couple quarters of higher GDP growth, corporates are looking to shed non-strategic assets or sell underperforming units, and then reinvest the proceeds in their existing growth platforms," said Rubino.
Though both buyers and sellers are focused on corporate M&A strategies that contribute to steady future growth over swift transformation, market consensus is still skewed in favor of buyers, the report found. A majority of survey participants, 62 percent, believe 2014 to be a buyer's market.
However, a quarter of participants, up from 16 percent in 2013, said this year favors sellers.
If the advantage shifts further toward sellers, it could mean prudent organizations will find themselves well-positioned for a gainful future sale, the report said.
On market valuations, the report said 83 percent of executives expect asset prices to remain stable or rise over the next year, another indication of a strengthening economy. Of their own companies, more than half of mid-market executives see valuations improving over the same period.
So far in 2014, much attention has focused on the degree to which the Federal Reserve trims its bond buying stimulus, which sent borrowing costs lower and equity valuations soaring, would cause a market correction.
As widely expected, some disruption occurred with equity markets selling off in reaction to Fed tapering. But in the middle market, where in 2013 a persistent gap between buyers and sellers on price was often cited as impeding M&A dealflow, moderating valuations could help narrow the bid-offer spread. In other words, tempered expectations on the offer side combined with increased confidence on bids could bring buyers and sellers closer on price.
"Valuations are correcting, but we are not seeing it dampen the expectations or confidence of CEOs," Rubino said.