| NEW YORK
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,"
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.