Insights & News

Looking Ahead: Middle Market M&A Trends for H2 2019

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This article is an excerpt from The BCMS Deal Update for August 2019. Get the full pdf here.

Liquidity and future interest rate cuts will sustain acquisition demand

  • Significant levels of cash on corporate balance sheets and equity capital raised by financial sponsors

  • Private equity and venture capital firms sitting on ~$1 trillion of “dry powder” (Source: Pitchbook)
  • In a low organic growth environment, many companies will look to grow via acquisitions
  • The Fed has stated that it will “act as appropriate to sustain the expansion” of the current economy – Fed interest rate cuts in the future will only help to increase acquisition demand

Interest rate cuts by the Fed will lower the cost of borrowing

  • The Fed has just announced an interest rate cut of 0.25%, the first in more than a decade
  • Many believe the Fed is also likely to cut rates at least one more time before January 2020
  • As the cost of borrowing lowers and transaction multiples remain constant, the effective purchasing power of potential buyers increases

Trade wars may affect valuations if margin degradations persist

  • Tariffs are increasing operational costs for companies across many industries
  • Trump stated on June 29th that, while negotiations continued, he would not increase further the existing 25% tariffs on approximately $250 billion of Chinese goods. In a subsequent tweet on August 1st, Trump stated “The U.S. will start, on September 1st, putting a small additional Tariff of 10% on the remaining 300 Billion Dollars of goods and products coming from China into our Country.” Meanwhile, the Eurasia Group forecasts only a 45% chance that a deal is made between China and the United States before the end of 2019
  • Firms will be wary of higher input costs and their impact on profit margins

Yield curve inversion may scare potential buyers

  • The recent 10Y-1Y treasury yield curve inversion suggests an incoming economic recession, which may discourage potential buyers from making acquisitions
  • The yield curve inversion is known to precede recessions by anywhere between two to six quarters, which means
  • Q4 2019 is likely the earliest time a recession might occur
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Posted Aug 2019
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