Middle-market companies seeking growth or liquidity have fueled a strong mergers and acquisitions market in recent years and expectations remain high for this year, but Citizens Commercial Banking’s annual survey found many companies see a slowdown on the horizon.

The survey of 600 companies nationwide found that as valuations hover at record levels, sellers are coming to market while buyers continue to search for good opportunities. Favorable overall economic conditions – an expanding economy, a supportive regulatory environment, beneficial corporate tax policies and still-low interest rates – have fueled an active deal environment, according to survey respondents.

The survey indicates a strong correlation between economic outlook and M&A activity with nearly 80 percent of respondents saying a strong economy invigorates their appetite to pursue either a sale or acquisition, depending on their situation.

However, respondents are feeling an increased sense of urgency because almost half of companies anticipate an economic slowdown in the next two years.

“Many companies see the economy at a mature point in the cycle and so both buyers and sellers may begin to accelerate their M&A strategies – a process that can take a year or more – to get ahead of an upcoming slowdown,” said Ralph M. Della Ratta, head of M&A Advisory, Citizens Capital Markets. “There is reason to believe a slowing economy would support a high level of M&A activity. Many buyers have retreated from the current market based on premium valuations, and their interest would likely be revived if and when pricing eases. For sellers, a more pronounced slowdown presents a conundrum. Act now or they could be faced with the reality of putting their exit strategies on hold until market conditions rebound, and hoping that company performance holds up in the meantime.”

Other key findings of Citizens Commercial Banking’s eighth annual M&A outlook include:

• Sixty-two percent of potential sellers are either actively engaged in an M&A transaction or are open to one in 2019 – a sizeable increase from the previous two surveys.
• Sellers are showing a high level of interest in international deals with 52 percent saying they would consider an international buyer with the hope they would retain the current leadership team, provide access to global markets and pay a higher price.
• Even sellers see M&A as a growth strategy, particularly with regard to divestitures. More than half of sellers surveyed indicated a primary interest in selling either a piece of their core business or a non-core asset or division.
• Despite high multiples, the majority of buyers see prices rising in 2019, while sellers are evenly split between expecting stable valuations versus higher valuations.

The majority of respondents in the technology and B2B services verticals expect multiples to rise in 2019. Healthcare companies were relatively balanced between expecting higher versus stable prices. Meanwhile, industrial and consumer services companies largely anticipate stable prices in the coming year.

Seventy-one percent of potential buyers are either actively engaged in an acquisition or open to pursuing one this year. It’s clear, though, that premium valuations and strong competition for deals, prevalent themes for the past several years, are tempering demand. At the outset of 2018, 79 percent of potential buyers were actively engaged in or open to pursuing an acquisition, and in 2017, that number was 84 percent.

Still, a majority of potential buyers remain actively in pursuit of M&A-driven growth with 80 percent of potential buyers surveyed either extremely or modestly confident of completing a deal in the next 12 months.

Buyer interest isn’t solely confined to the domestic market, as nearly six in 10 respondents indicate they are likely to consider international prospects. Access to new markets is a key attraction, but companies also cite simpler regulatory environments as a draw. The strong U.S. dollar is another factor, as 30 percent of buyers say favorable exchange rates are steering them toward international opportunities.

Overall, buyers expect the capital markets to remain accommodative in the year ahead. The majority say that current interest rates and debt-financing terms will either aid or have no impact on their acquisition plans.

Buyers and sellers are equally inclined to partner with an advisor as it pertains to their M&A initiatives. Nearly two-thirds of all respondents said they would prefer to engage experts to aid in the execution of their M&A deals.

Buyers show a strong preference for sellers who engage an advisor, with two-thirds of surveyed potential buyers indicating that it is helpful to the process. They believe it will expedite diligence, and they also see advisor engagement as a show of commitment by the seller. Buyers also believe advisors help keep negotiations at a professional level.