Midmarket activities throttle back in Texas
Mergers and acquisitions involving middle and lower middle market Texas businesses has slowed considerably 2018, and the current fourth quarter is on track to have the fewest midmarket M&A since early 2010.
New data by Mergermarket, provided exclusively to The Texas Lawbook, shows that the number of M&A deals involving Texas businesses with a deal value of $500 million or less was down 14.8 percent during the first three quarters of 2018 compared with a year earlier.
Midmarket dealmaking for Texas companies in the fourth quarter is on track to record fewer than 70 transactions for the first time since the first quarter of 2010 and would be a 15 percent drop from the third quarter and a 22 percent decrease from the fourth quarter of last year, according to Mergermarket.
“The significant decline in the middle market and lower middle market M&A is actually quite sur-
prising,” said Chad Watt, southwest bureau chief at Mergermarket in Dallas. “We are seeing the lowest deal count in the middle market – and especially in the lower middle market — since 2009 and 2010."
Dick Wynne, a partner at Winston & Strawn in Houston who works on a lot of oil and gas deals, said the third quarter was very strong but the fourth quarter has been softer, which could be because of the recent commodity price drop.
“Even though crude prices have been off over the last month, middle market companies – particularly in the oil field service space – have posted much-improved operating results,” he said. “As a result, I am seeing a shift toward an increase in sellside activity for next year.”
M&A experts also say that they have seen a reduction in acquisition and divestiture transactions because they are dependent on commodity prices.
“Currently there is so much volatility that there is a disconnect between the commodity price expectations — and similarly the price of the asset — between buyers and sellers,” Latham & Watkins partner Michael Dillard said.
Unlike the energy sector, which recently has been spooked by lower oil prices, the technology industry is a hotbed of dealmaking and Munsch Hardt Kopf & Harr partner Rob Kibbe doesn’t see it slowing down.
“Literally a minute ago, I received another email from a referral looking for help on a sale of a company,” Kibbe said. “There’s just so much money out there that’s looking for a home. More deals are also going through a process, with an investment banker hired to shop them, which creates a lot of interest and a lot of work as well.”
On the industrial and manufacturing side, Greenberg Traurig partner Scott Ellis in Dallas said several of his clients don’t seem to have been affected by any industry slowdown.
“There is a little more difficulty getting the debt piece done, as it seems sponsor lenders may be tightening on the credit side, but this challenge has not been insurmountable,” he said. “Going into 2019, companies seem to still be cautiously optimistic as it relates to the ability to get quality deals done and the market generally.”
Amy Curtis, a partner at Thompson & Knight in Dallas said there are several reasons to be optimistic that 2019 will continue to be a busy year for middle-market M&A activity, particularly because tax relief has left buyers with additional cash to spend.
“When it comes to energy M&A in Texas, all eyes will be on commodity prices, as continued volatility could slow planned transactions,” she said. “But generally, the sentiment from executives seems to be that 2019 will bring increased activity for deals.”
Around the country, worries persist about mid-market M&A. In a report released in November, Akerman and PitchBook wondered if the U.S. middle market was losing its “torque,” with transaction activity experiencing a marginal decline in the third quarter on a volume and value basis despite a projected record year for these buyouts.
They said it “raises the question of the extent to which this historically long deal bull run may be getting long in the tooth.”
Akerman and PitchBook project an 11 percent in increase in buyout activity in the U.S. middle market for all of 2018, including a 15 percent jump in deals with enterprise values of less than $200 million.
In Texas, middle market M&A volume peaked in the second quarter of 2014, when businesses in the state were involved in 128 such transactions valued at $14.3 billion, according to Mergermarket. By contrast, there were 83 mid-market deals in the third quarter of 2018 with a value of $9.2 billion.
Meanwhile, middle market M&A values in the state peaked in the fourth quarter of 2014 at almost $15.2 billion spread across 113 transactions.
The yearly peak in middle market deals was in 2014, when 472 deals were announced worth $50.9 billion. The yearly levels have been up and down since then, but mostly down, with only 299 deals worth $36.3 billion announced so far this year.
Mergermarket’s Watt points out that the most significant decline has been in the lower middle market. The number of deals this year involving Texas companies valued at between $5 million and $100 million isn’t expected to exceed 200 for the first time since the Great Recession of 2008 and 2009.
There were 178 such lower midmarket transactions during the first 11 months of 2018. Watt predicts only a dozen more will be announced in December and that the final deal count will be about 190 — or about 22 percent fewer than in 2017.
Midsized deals in the middle market ($101 million to $250 million) haven’t done much better, amounting to 73 so far this year valued at $12.2 billion versus 94 worth $16.5 billion for all of 2017.
Higher value deals in the middle market (the $251 million to $500 million range) have performed a little better, with 48 deals worth $17 billion so far this year versus 47 worth $16.9 billion for all of 2017.
For a longer version of this article, please visit TexasLawbook.net.