Mid­mar­ket ac­tiv­i­ties throt­tle back in Texas

Houston Chronicle - - BUSINESS - By Claire Poole and Mark Cur­ri­den

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.

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