M&A Trends in the Middle Market

While Fortune 500 companies and sexy startups often get more media attention, the middle market is a powerful force, made up of nearly 200,000+ businesses, or three percent of all U.S companies and one third of all U.S. jobs. Middle market companies typically have annual revenues of $10MM – $1B and may be private and public, family owned, and sole proprietorships, geographically diverse, and span almost all industries. Given their size and variety of ownership, these businesses often endure a lot of change over time.

According to the National Center for the Middle Market, age and retirement are among the top reasons for leadership changes or major transitions in middle market companies. Larger organizations are more likely to make changes to spur growth and competitiveness. Sole proprietors and partnerships are more motivated to scale, while publicly held companies are more motivated to create change at the top. The most successful companies with the most longevity have figured out how to navigate these inevitable transitions successfully.

3 M&A Trends in the Middle Market

There are several broad trends that we’re observing in M&A activity within the middle market:

1. Mergers to gain innovation – As generations change, so do consumer needs. Making the right investment in innovation can help a company remain nimble as disruptors continue to enter the market. A great example is Coca-Cola’s $5.1 billion acquisition of British coffee chain Costa Coffee. By purchasing rather than creating innovation from scratch, Coca-Cola not only now has a strong coffee platform in Europe, but also acquired access to Costa’s coffee sourcing, vending and distribution expertise. A particularly smart move as consumers shift away from sugary drinks.

2. Mergers to gain a competitive edge – Amazon’s purchase of Whole Foods was understandably big news. What is interesting to watch is how other companies have reacted to stay competitive. Shortly after the Amazon purchase, Sprouts Farmers Market, the supermarket chain (a direct competitor to Whole Foods) announced a partnership with grocery delivery technology company Instacart, initially sending its stock soaring 5 percent. Smart companies are making purchases to gain innovation to stay on par with or ahead of their top competitors.

3. Alternatives for growth, outside of traditional mergers – While there are still plenty of auction-based deals, private equity enables a company to partner with a firm that maybe better aligned on strategic objectives. Forming the right partnership with a private investor or firm, means not only capital to expand a business, but also valuable expertise to redirect strategy. For example, Roark Capital is a private equity firm with a focus on fast-casual dining, perhaps best known for purchasing and turning around Arby’s in 2011. More recently, Roark acquired Buffalo Wild Wings for $2.9 billion. With its vast restaurant expertise, critical insight, and keen understanding of fast casual consumers, Roark is set to help Buffalo Wild Wings revamp its image to appeal to a new generation of diners.

Although the examples above represent the higher end of the Middle Market we’re seeing these same trends play out at the lower end of the Middle Market ($5M-$75M in revenue) with clients taking advantage of current market opportunities.

We help Middle Market companies strategically assess their options and prepare for big transitions. Please contact us for a confidential discussion