Overall M&A Market Commentary
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Middle market M&A activity continued its decline in 3Q17, recording another quarter of lower deal volume and lower dollar value. While on the surface this is disconcerting, there appears to be reason for optimism for a trend change. Quarterly GDP growth has started to show improvement above the trend line of 2%. The third revision of 2Q17 GDP growth was 3.1%, up from the second estimate of 3.0% and above the 3.0% barrier that many economists believe is difficult to achieve. While recent hurricanes and continued political uncertainty are expected to produce a drag on GDP for the last half of 2017, the consensus expected 2017 GDP is in the mid-two percent range. Further, the Michigan Consumer Confidence Index and the NFIB Small Business Optimism Index are both trending higher reflecting rising consumer and business owner optimism. Business optimism is strong. A recession does not appear to be in our near term future.
The cause for optimism? The duration of the post-recession economic expansion is reaching record territory. “If the current economic expansion lasts another year and a half, it’ll be the longest on record, even surpassing the expansion of the 1990’s that ended in early 2001,” said Brian Wesbury, Chief Economist of First Trust Advisors and former Chief Economist of the Joint Economic Committee of the U.S. Congress. He continued, “Notice how we didn’t say it’ll be the best expansion of all-time, just the longest; it’s not the best by a long shot. From the recession bottom to the expansion peak, real GDP expanded 39% in the 1980s and 43% in the 1990s. So far, eight years in, this one is only up 19%. That’s why we’ve been calling it the Plow Horse Economy.”
However, Wesbury’s “Plow Horse Economy,” combined with consumer and business optimism has produced positive market sentiment. The DOW has advanced almost 25% since the election last November. Further, the S&P 500 has increased above $20 trillion in value for the first time in history. The improvement in the job market is also accelerating, producing more monthly full time jobs than in previous years. A belief that there will be additional reductions in business regulations, a continuation of a more business friendly government and some sort of tax reform could continue this optimism. The distracting partisan political drama in Washington has been the main media focus while the improving economy and stronger business earnings trends have been somewhat ignored. With improving corporate earnings and growth in the global economy, the positive trends in the financial markets are expected to continue.
For additional insight on middle market M&A, valuation multiples, strategic buyer / financial sponsor activity, and more please download the full copy of the Prairie Middle Market Perspective.