THE 5-YEAR ROLLER COASTER OF CROSS-BORDER MID-MARKET M&A

The results are revealed in the latest edition of Moore’s Compass Report which analyses activity in this increasingly important part of the M&A market made up of transactions valued between €10 million and €200 million.

The other main findings were:

•   35% of all mid-market M&A deals are now cross-border

•   Cross-border transactions systematically account for one-in-four of all M&A deals

•   Average deal size in the cross-border mid-market has grown from €42.4 million in 2019 to €47.4 million in 2023 – a rise of 12%

•   62% of all cross-border M&A last year took place in the mid-market

•   Four-out-of-ten cross-border deals in the mid-market involve acquirers from North America

•   More than half of cross-border mid-market transactions were focused on the IT and healthcare sectors

This year’s Compass report, produced by Moore Global Corporate Finance in partnership with Vlerick Business School in Belgium, offers a fascinating insight into the state of the mid-market before, during and after Covid.

It paints a picture of a roller coaster period of pre-Covid boom followed by a lull as the pandemic disrupted lives, businesses and economies. There was a renewed burst of activity when it became clear the worst was over but that, in turn, gave way to slower deal flow in the last two years as inflation rose sharply.

As interest rates were increased to counter the effects of inflation and the energy shock caused by war in Europe, banks tightened their lending criteria. The result? Transactions have become steadily more difficult to conclude and the cost of borrowing to fund deals has risen – but there are hopeful signs of a return to growth in 2024.

In 2019 economic activity across the world was strong and that was reflected in the number of M&A deals that were completed: 42,714 in total and more than 5,000 of those in the cross-border mid-market.

The following year, in the depths of Covid, activity dropped back significantly before a post-pandemic bounce in 2021 saw deal flow very close to the 2019 level with 41,600 transactions completed.

Higher interest rates in 2022 and 2023 have been accompanied by long periods of sluggish economic growth, and occasional contraction. That has had an impact on the ability to raise finance required for M&A.

Cross-border deals are even more complicated than domestic purchases because of different regulatory regimes, legal structures and financial infrastructure – as well as the unfamiliarity of operating in a foreign country.

“The cross-border mid-market segment is a niche but it is also an essential segment of the total M&A market,” says Kerstin Fehre, professor of strategy at Vlerick. “Like other segments, it was confronted with a challenging economic situation but was more stable in terms of average deal values than other parts of the market.”

Against these odds, it is telling that the cross-border market component of the wider M&A ecosystem has held up so well. In the mid-market, 35% of deals were cross-border in 2023.

This may be partly explained by the higher average returns they generate compared to deals confined to the domestic market. However, there is also a trend towards further integration of pan-European businesses at play.

While the total number of M&A deals slipped back 13% last year from 2022 levels to 32,447, this does not tell the whole story of positive progress.

In the mid-market there was a steady rise in the number of deals announced and the average value of those transactions throughout 2023. Looking more closely at the cross-border element, there was a rise from 775 deals in the first quarter to 920 announced in the three months up to Christmas.

Significantly, the average size of those deals rose faster in the cross-border sector than in mid-market M&A overall – up to €49.3 million by the fourth quarter from €35.4 million at the start of the year.

North American companies remain the most active acquirers in the cross-border mid-market and are involved in more than 40% of all deals. However, last year Asian companies – principally from China – continued the recent trend of looking across borders to buy businesses.

US companies traditionally looked to the United Kingdom first for deals but the big shift last year was the growing attraction of Australia as a target. American acquirers targeted the country because of its huge mineral resources. This is viewed by some as a hedging strategy against increased competition for the raw materials required to build batteries for electric vehicles and other green technologies.

Almost one-in-four companies acquired by US firms was in Australia. UK companies were next on the list but only accounted for 8% of the total.

However, UK buyers still lead the way in Europe and are behind almost 30% of deals. While the US is still the favoured hunting ground of British firms, there is now almost as much deal activity in Australia.

Elsewhere in Europe, the countries with the most active buyers are France, Germany, The Netherlands and Sweden. The reason for that becomes clearer when looking at the “hot” sectors where the majority of deals are being done – more than half of cross-border mid-market M&A was in IT and healthcare, where northern European countries are strong.

The average deal value in IT globally was almost €38 million while it jumped to €48 million in healthcare. However, both of these were eclipsed by banking, insurance and financial services where transactions averaged around €63 million. We see the same average value in metals transactions with North American acquirers.

This year’s Compass report also analyses the shifting nature of ownership. While financial buyers and corporates account for a large slice of the market, the growing influence of family offices is apparent. Some 10% of companies acquired in the cross-border mid-market were bought by families and individuals, many no doubt using proceeds from previous M&A deals.

The Vlerick analysis confirms that cross-border M&A activity involving mid-sized companies is an important niche that is becoming ever more sophisticated.

The complexities of doing deals in foreign countries requires specialist knowledge and specific skills in order to successfully conclude transactions.

“Cross-border M&A transactions have always been more complex than domestic deals but they are of strategic importance when building your business,” says Philippe Craninx, chairman of Moore Global Corporate Finance. “With our wealth of experience we are able to help clients negotiate every stage of a cross-border deal and structure it in all its complexity to ensure the right outcome.”

While the complexities of cross-border M&A represent a challenge, the rewards of a patient approach are successful transactions that create more robust and sustainable businesses that generate significant additional value over the long term.