The so-called “middle market” has driven U.S. mergers and acquisitions activity for the past several years, with over 90% of transactions taking place in companies valued at less than $500 million.  But deal flow in 2012 was low, surprising just about everyone. Here’s what happened, and why deal-making should pickup in 2013.

Political Certainty  (Or, at least, diminishing political uncertainty.)  By now, it’s all but guaranteed that Washington will reach a deal on the fiscal cliff, and that deal is very likely to include an agreement on raising the debt ceiling for at least a year.  This means that the endless saga of political uncertainty we had in 2012 - the debt ceiling, the Affordable Care Act, the election, the fiscal cliff, and then the debt ceiling again - should be largely over.  Business owners and CEOs are expected to heave a great big sigh of relief and then begin moving forwards on the big projects they’ve been putting off, like expansion, hiring, and mergers and acquisitions.

Economic Growth  It’s hard to see amid all the media babble, but our economy continues to grow, even if it’s growing more slowly than we would like.  Consumer confidence is said to be at a high, although I’m curious to see what happens during the rest of the shopping season.  Corporate credit is becoming more readily available.  The housing market is finally starting to recover, and we’re expecting to see growth in numerous other sectors, such as retail, aerospace, the auto industry, and energy.

Foreign Investment  The U.S. is still the safest place to invest your money.  Europe is a shambles, and the emerging BRIC countries (Brazil, Russia, India, China) come with much higher risk.  By historical standards, the dollar is still undervalued.  Companies in foreign countries are taking advantage of these circumstances to acquire American companies, getting a foothold here with a built-in customer base. 

Available Cash  Corporations have $1.8 trillion in cash available for mergers and acquisitions. Private equity groups have $430 billion - and, contrary to expectations, they just didn’t do that much with it in 2012.  That means that in 2013 they have all the same incentives to put that money to work (corporations don’t want to pay dividends, private equity groups and venture capitalists have to give their investors a return on investment), plus an added dose of urgency. 

Multiples are strong for well-performing companies.  If you’re thinking about selling in 2013, get your financial house in order and put together a selling team to market your company. 

Here’s to a prosperous New Year.