“Barbarians at the gate” is an idiom that has lived past its shelf life. Classifying PE firms as barbarians implies they can raid and conquer at will. There was a tinge of truth to that in the 1980s, but it’s a laughable argument in today’s market. As any investor will tell you, the closest thing to a barbarian these days is an eager strategic buyer. When strategics want an asset in the current market, PE firms aren’t going to be able to outbid them, especially in a low-growth environment. The benefit of lower capital costs alongside synergy opportunities will always have a leg up on IRR-bound PEGs.
The featured chart, taken from our 2Q 2018 M&A report, breaks down median deal sizes in North America and Europe by platform buyouts, corporate acquisitions and PE-led add-on deals. The median deal size of an add-on buyout grew at a fairly modest pace of 10% from 2016 through the first half of 2018, compared to the median deal size of a platform buyout, which grew about 41% over that same time period. Meanwhile, the median deal size for corporate acquisitions clocked in at nearly 56% higher in 1H 2018 than in 2016.
The broader takeaway is that corporate buyers are more prolific at the low end of the market than many realize. Strategic acquisitions don’t necessarily have to boost scale to make sense; many acquisitions are now done to speed up product development and distribution in order to keep up with competitors. Many of those smaller, corporate acquisitions could have been suitable for PE as standalone targets, at the right price. But as long as corporate interests keep raiding auctions looking for growth, PEGs will continue to have fewer opportunities to pursue than they otherwise would have. The impact on PE is most felt at the lower end of the middle market, and by extension the broader middle market as potential add-on targets. It’s hard to think of LMM investors as barbarians when they miss out on opportunities due to the “product development” needs of a competitor.
This column originally appeared in The Lead Left.
Read more about strategic acquisitions in our recent M&A report.
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