M&A, Capital in the New England Mid-Market

This post continues an anecdotal review of the investment and M&A climate as the world does, or does not, emerge from the economic unpleasantness that started in 2008.

Kevin Dunn and Ed Pendergast are managing directors of Dunn Rush & Co., a successful Boston based mid-market investment bank serving the M&A, recap, ESOP, private placement, financial advisory services marketplace.  Their experience is basically agnostic as to industry sector.  Kevin previously was Vice Chair of the US division of Canaccord Adams and CEO of Boston based Adams, Harkness & Hill; Ed is an active director of public and private companies and past Vice Chair of the Greater Boston Chamber of Commerce and past President of the Mass Society of CPAs and the New England Chapter of the National Association of Corporate Directors.

Of course, statistics abound from all sources relative to the state of financial activity in the middle-market.  Dunn Rush statistics are consistent with those of other investment banks; number of deals and deal values in the mid-market, particularly transactions below $50,000,000, are recovering from 2009 levels, and multiples of EBITDA similarly are recovering.

There continues to be a marked, indeed an even increased, size premium in middle-market M&A, which is to say multiples for larger acquisitions are more robust than for smaller ones.  Dunn Rush attributes this growing size premium to the investment appetites of many private equity firms that seem to insist upon, and are willing to pay for, companies with an EBITDA of more than $10,000,000.  This leaves smaller deals with less price competition.  Although pricing generally is back to 2007 levels, the size premium similarly has returned to the 2007 range.

Their M&A in New England has not seen much impact from foreign buyers, and indeed on the sell side an approach to strategic buyers remains the norm.  However, the pressure for making sales has increased among clients.  Factors driving the urge to sell noted by Dunn Rush are the following:

  • Industry consolidation which makes competition by smaller companies more difficult.


  • Lack of available capital to expand.


  • Pent up demand, including age of owners (the sale of a business at lower recession multiples was less attractive and thus delayed).


  • Political and marketplace uncertainty.


  • Possible fear that capital gains rates will increase (although this is likely not a significant driver).

What companies are getting acquired in the New England marketplace?  Companies with cash flow are selling to financial buyers.  Strategic sales continue strong.

The PE funds are “like a commodity” in how they operate; there are many, all chasing the same type of deals, and all with lots of money to spend.  This bids up the EBITDA-strong targets.

Do certain sellers avoid private equity buyers?  The answer is yes, they don’t want to see their life’s work leveraged up to finance the acquisition, and their life’s work thereby possibly placed at risk.  Some sellers also still also want to protect their workforce.  All of this can be done but it comes at a cost, in terms of net price.

If a company in New England is looking for financing for growth, but not to sell out, what about the availability of capital?

Dunn Rush is not in the start-up market, which is a wholly different story involving venture capital, angels and the like.  (A future post will discuss some aspects of this market.)  Equity remains very difficult to raise.  There is a vigorous market in sub-debt with warrants, and also bank financing for worthy borrowers ($5,000,000 minimum generally applies).  The sub-debt market is strong with target yields of 18% or 20%, a mixed yield based upon the coupon plus the attached warrant.  This kind of financing is attractive from the lender standpoint because of the spread between cost of money and yield.

As for the banks, the mid-cap regional banks are easier to access than the giant national banks, and Dunn Rush says they have excellent access in this regard; the larger banks “have their own problems” which are well known and beyond the scope of this post.

Kevin and Ed are optimistic for both the US and the New England economy, and find that businesses are “doing fine this year” in the US.  This conclusion is generally consistent with my own observations, although early stage equity capital remains a big problem which is only partially being addressed by the angels moving up into, and PE firms moving down into, the VC space.

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