State of the M&A Market: Buyers Stay Close to Home

“Stay close to home” appears to be the mantra of most U.S. M&A transactions.  Buyers purchased businesses close to home (in the same region) nearly 50% of the time in 2012. This “home proximity” increases to 75% when adjacent regions are included. This data from 2012 is not surprising, as this is a ten year trend in acquisitions. In 2002, 46% of U.S. M&A transactions, with a U.S. buyer and target, involved a buyer and target located in the same region. Between 2002 and 2012, the percentage of intraregional transactions varied slightly, depending on the market; however, it has never fluctuated more than 4% from the 2002 level.

These statistics are driven by strategic buyers as they have consistently represented more than 90% of the market. In 2012, 49% of strategic transactions involved a buyer and target in the same region. Strategic buyers in the West Coast (56%) and Great Lakes (51%) were the most acquisitive within their own regions. One explanation for this is that strategic buyers target expansion outward from their core operations in order to maximize operating synergies. Intraregional acquisitions many times represent the first steps for outward expansion.  Assimilation of an acquisition is difficult and made more so the further away the location of a new business unit.

Private Equity (PE) buyers are less geographically focused than strategic buyers. As represented in the graph below, the percentage of PE transactions involving a buyer and target in the same region has declined from 2002 to 2012, with the exception of an unusual spike in 2009. In 2002 the percentage was 35% and by 2012 it had fallen to 29%. For example, the Northeast region contains the most active PE buyers, as they have been involved in over 40% PE transactions every year. This region has also been one of the least acquisitive within its own region. In the Northeast region in 2012, only 21% of all acquisitions happened with parties within the region. One explanation for this trend in all of the regions is that PE buyers by nature are usually geographically agnostic. PE is primarily focused on acquiring strong platform companies and the region of the target is a secondary issue of less importance.

Source: S&P Capital IQ and PCE Investment Bankers

Market Activity

M&A activity fell significantly in the first quarter of 2013 compared to the fourth quarter of 2012. The first quarter of 2013 was the worst quarter, in terms of transaction volume, since the third quarter of 2009. The M&A market was stymied by a reduced deal pipeline to start the quarter and ambiguity over sequestration throughout the quarter. At the end of 2012, a number of deals had their sale cycle accelerated to make use of the advantageous capital gains rates. This propelled deal count forward in the fourth quarter and reduced first quarter deal count. The reduced deal pipeline at the start of the quarter was also the result of the uncertainty over 2013 capital gains rates that plagued the second half of 2012. Owners decided to delay the sale decision making process instead of initiating a transaction with unknown tax consequences. Ambiguity over sequestration placed a dark cloud over a number of industries/companies, which reduced the pool of possible buyers.

On a rolling 12-month basis through 1Q13, total transaction volume was approximately 8,958 deals, while the year prior was more than 9,610. From a value perspective, of the deals that disclosed transaction values (~ 24% of strategic buyers and ~ 26% of PE buyers), the market observed an uptick in dollar growth. Strategic value increased from $571 billion to $647 billion on a rolling 12-month basis through 1Q13 over 1Q12. PE funds invested $63 billion on a rolling 12-month basis through 1Q13, compared to $53 billion for the same timeframe through 1Q12.


The reduced level of M&A activity in the first quarter may continue throughout the second quarter because of the reduced deal pipeline at the beginning of the year. However, expectations and anecdotal data indicate that deal activity will increase throughout the second half of 2013. The deal pipeline has increased since the beginning of the year and buyers continue to be deeply motivated. Buyers will drive demand as a result of the excess cash on corporate balance sheets, a favorable debt market, and PE with a significant amount of dry powder.

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Michael Poole

Investment Banking
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