Experts See Increase in Middle-Market M&A Activity in Second Half of 2010

As the corporate sector continues to try to claw its way back from the recession of the last two years, middle-market M&A activity is once again on the rise and the second half of the year should be stronger than the first, says Maryann Waryjas, a corporate partner with Katten Muchin Rosenman LLP in Chicago who focuses her practice on complex M&A deals.

“The increase started at the end of Q1 and picked up in Q2, with a bit of choppiness in there,” Ms. Waryjas says. “A lot of the appreciation in value is dependent on the trailing 12 months, but because everybody knows how rough last year was, we are really looking more at the trailing six months.  Therefore, growth and stability in the first half of 2010 are very important."

As the lending markets open up, Ms. Waryjas says that some banks are becoming very aggressive in providing transaction financing.   However, required equity contributions remain relatively high, usually more than 30-percent and some reaching 50-percent or higher.

Another deal driver, she says, is the change in the long-term capital gains tax rate, which will rise from 15-percent to 20-percent on Jan 1, 2011.

“If you are contemplating being a seller, it makes sense to do the deal in 2010 rather than waiting until 2011,” Ms. Waryjas says.  "By way of example, consider a firm with EBITDA of $10 million that would sell at a 7x multiple. While the proceeds would be $70 million in both cases, the difference in capital gains tax from 2010 to 2011 would be $3.5 million.  That’s real money and enough marginal increase to compel a lot of people who have been contemplating whether to sell to move forward.”

Ms. Waryjas is available for interviews on the current recovery in the middle-market M&A sector, as well as on general topics related to M&A activity. [07/20/2010]