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Dealmaking in the mid-market is showing a heartbeat. After a dire 2009, mergers and acquisitions activity has picked up.

Deals for companies worth up to $500m (£330m, €364m) have totalled $66.6bn so far this year, a rise of 28 per cent on the same period last year, according to Dealogic. Also, European mid-market volume – the worst-performing region in 2009 – is up 36 per cent year-to-date to $22.3bn.

Simon Tilley, managing director at Close Brothers Corporate Finance, says the advisory house has seen a “big uptick” in deal completions since the start of the year. Sentiment seems to be better, and a lot of activity has been driven by private equity because there has been a sense of frustration about the lack of movement in the past two years, he says.

“Banks also have a greater confidence in corporate profitability and a sense that, if a good business has made it through the past two years, then it has a resilient business model and is going to be received well,” Mr Tilley says.

The impetus from private equity comes as funds seek to sow the capital they secured in the peak fundraising season of 2005-07. The clock is ticking on funds raised during that period to be invested in the next 12-18 months. If the funds are not invested, private equity firms face the prospect of having to revise terms or cancel their commitments.

Steve Tudge, a managing director at ECI Partners, a UK mid-market private equity firm, says his funds still have four years to run, but he knows of many others that are feeling the pressure to make “a use-it-or-lose-it type of decision”.

Mr Tudge says the banks are opening up debt funding for mid-market deals. Royal Bank of Scotland, HSBC and Lloyds are “open for business”, he says. “We are getting back to a 50 per cent equity, 50 per cent debt financing structure in the mid-market,” he says.

With expectations that activity in the mid-market may outpace the larger market this year, financiers say big investment banks will continue the trend of grazing among smaller deals.

A rundown by Thomson Reuters of the biggest dealmakers by value in the mid-market in 2009 included JPMorgan in first place, followed by Goldman Sachs and Morgan Stanley. Freshfields led the legal adviser rankings.

The frail state of the banking sector made dealmaking in the mid-market tough last year. It also affected corporate confidence. In 2009, many deals were aborted or failed to be completed because price expectations could not be met.

But, having taken a breather after the collapse of Lehman Brothers, the US investment bank, company executives are now realising they need to hunt for targets or risk their companies being taken out by other acquirers, financiers say.

The three-way, £1.25bn (€1.37bn) bid battle including UK support services companies VT, Babcock International and Mouchel is symptomatic of the pressures facing companies further down the corporate food chain, say corporate financiers.

“We are talking to companies in the £100m-£300m market capitalisation range, and they are saying that if they don’t do something actively, they could be a target rather than an acquirer,” says Stephen Baker, corporate finance partner for Grant Thornton, the accountancy firm. “The combination of private equity, corporates needing to buy and sterling weakness creates a good buy-side thrust. The key question is: will anyone sell?”

Weakness of the UK economic environment and sterling could make a difference to overseas bids. Mr Baker says he knows of two or three Australian companies, for example, that are looking at UK companies in the mid-market.

Chris Hemmings, global head of corporate finance at PwC, the consultancy, says: “What we are seeing is that North American corporates have reached a point in their cycle of thinking about divestiture of their mid-market businesses. It’s about better use of capital and cleaning out groups so they can make acquisitions for their core business further up the road.”

There were 335 announced US mid-market M&A transactions in January 2010, a 12.4 per cent increase over the same period last year, according to Robert W. Baird, the investment bank. Dollar volume increased over that same period by 30.2 per cent to $16.1bn.

Activity is also stronger in Latin America and Australasia, where companies have been barely touched by the economic crisis relative to Europe and financing is far more available.

M&A activity in western Europe is lagging behind the US, and may take many years to return to its pre-financial-crisis health. But the post-crisis “new era” may see many new kinds of opportunities coming out of debt-mired states, say corporate financiers.

The UK Treasury’s Operating Efficiency Programme, which addresses a series of state assets that could be put on the block over the coming years, is a focus of interest. More than 30 assets identified by the programme – such as the Land Registry or Ordnance Survey mapping system – have potential for private-sector involvement, says Neil Sutton, head of corporate finance at PwC in the UK. Some of these are estimated to have transaction values of £200m-£300m.

However, even more interesting deals could come from the government’s plan to reconsider what to do with its back-office function. Mr Sutton says “huge opportunities” could arise from any move to turn the state sector pension office, human resources or accounting function into large commercial operations to rival the likes of Capita, the support services group.

At Unicredit, one of Europe’s biggest banks, Vittorio Ogliengo, head of financing and advisory, is also seeing prospects opening up. Unicredit, which has its biggest clients in Italy, Germany, Austria and Poland, has found greater pricing flexibility, particularly in emerging Europe, as the difficult economic environment has left some entrepreneurs struggling. “It’s making deals more affordable for midsized buyers,” Mr Ogliengo says.

Companies in mature markets are increasingly looking at acquisitions in eastern Europe as a means of maintaining growth, he adds. Energy, basic materials, technology and capital goods are the most active sectors. In Russia, Unicredit is receiving advisory requests from state-owned companies considering privatisations.

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