December 06, 2023
The middle-market is tipped to be the principal driver for dealmaking in the coming year, according to Translink Corporate Finance’s ‘2024 Megatrends Report’. Featuring insights from Translink partners from around the world, the report identifies six top trends that will shape the M&A landscape in 2024 and beyond. As the engine room of M&A activity, the middle-market presents compelling opportunities for business owners. Market movement highlights discussed in the report include:
- Generational shift in entrepreneurship: The middle-market is experiencing a pivotal shift as established entrepreneurs in their 50s consider succession plans.
- Macroeconomic impact on M&A: The pandemic and global geopolitical events have disrupted supply chains, influenced inflation, and altered consumer spending, increasing opportunities for consolidation in the middle-market.
- Sector-specific opportunities and challenges: The report anticipates a surge in M&A activity across various key sectors in 2024, driven primarily by the middle-market.
Factors driving the 2024 middle-market dealmaking engine
Translink defines the middle-market as companies valued between EUR20 to EUR200 million and highlights this segment’s unique challenge: a generational shift in entrepreneurship. Hüchting and Davies say, “Many established business owners are contemplating succession in their 50s, creating a gap for potential acquisitions as their children, often in their 20s, may not be ready to take over. This combination of factors is shaping a new era of M&A.”
Additionally, macroeconomic shocks like the pandemic and geopolitical events have disrupted supply chains, brought inflationary and cost pressures, and reshaped consumer spending patterns, magnifying the opportunities for consolidation in the middle-market in 2024. Considering the renewables sector as an example, fragmentation exists in R&D, manufacturing, installation, repairs, and services for domestic green energy provision, providing opportunities for more prominent players aiming to consolidate amid the global push for net zero.
Key middle-market trends investors should look for:
Translink’s report lists several reasons why the middle-market is ideal for dealmaking in 2024, including:
- Stability and growth potential: The report emphasises that mid-market companies, typically more stable and agile than startups or small-cap firms, form a significant part of a country’s company structure. This stability makes them attractive acquisition targets, allowing acquirers to diversify their risk by purchasing multiple mid-market firms across different regions, each adapted to local markets.
- Keeping up with the competition: Middle-market companies demonstrate agility in strategic investments, swiftly enhancing infrastructure and talent to ensure competitiveness against larger counterparts.
- Valuations are coming down: The succession challenges, coupled with recent macroeconomic uncertainties, have increased entrepreneurs’ willingness to divest what is often their single largest family investment, creating favourable conditions for acquisition activities.
- Niche expertise: Larger companies seeking new growth avenues may acquire smaller companies to access their specialist capabilities and the niche markets they serve. Central to this integration is the need for acquirers to handle both the transaction process and post-deal integration strategy delicately and with careful planning, ensuring that they deliver the commercial rationale and financial synergies of the acquisition while retaining and developing the target company’s core capabilities and DNA.
- The private equity (PE) battlefield: Generational shifts create a pipeline of targets, fuelling the rising appeal of ‘buy and build’ strategies, which intensifies competition among private equity firms. Initial consolidation sparks interest, creating room for multiple players in various niches.
- Digital transformation: In the middle-market, firms fall into two categories: digitally transformed and those yet to adapt. The former are premium but costly targets, while the latter offer robust prospects for experienced acquirers. Evaluating the digital transformation cost, or ‘tech debt,’ early in the acquisition process is crucial.
These middle-market industries are geared for success:
Translink’s report indicates that as the global market landscape evolves, industries stand out for their robust growth potential and emerging dealmaking opportunities. The report anticipates a surge in M&A activities across various sectors in 2024, presenting unique prospects and challenges for investors and corporations. These industries include:
- Healthcare technology: Dealmaking remains appealing yet costly due to high demand in this sector. Collaborating with an advisor for proactive, personalised discussions with potential sellers is invaluable. This approach increases the likelihood of engaging with targets not yet in the sales process, offering the opportunity for exclusive negotiations and the potential to secure a more affordable deal.
- Ecommerce and logistics: Post the pandemic, the ecommerce hype has died down, prompting challenges in the sector. The logistics sector has been impacted heavily by global supply chain disruptions. This could create opportunities for savvy acquirers to invest in more affordable targets dealing with commercial, strategic, and generational issues.
- Renewable energy and sustainability: Strong demand means high valuations for this broad sector. The European-wide strategy of energy transition away from fossil fuels and towards more sustainable energy sources is driving significant dealmaking activity in the renewables sector. The push towards “net zero” targets will only intensify this activity through 2024.
- Technology services: Consolidation is widespread, leading to the proliferation of small to medium-sized companies. This trend presents strategic acquirers with favourable opportunities for expansion.
- Packaging and labelling companies: The surge in the home delivery market during COVID-19, coupled with the influence of the ‘Amazon effect’ of next-day delivery and the technologies supporting this, continues to drive the demand for companies servicing this trend.
Hüchting and Davies conclude, “It’s clear that the middle-market landscape is more than just an area of opportunity, but a transformative force in the M&A arena. The 2024 Megatrends Report sheds light on the nuanced dynamics within this market, illustrating how strategic shifts, digital transformations, and evolving business models are shaping a new frontier in dealmaking. At Translink, we stand at the forefront of this evolution, partnering our clients to help them identify and capitalise on the emerging trends.”