Although it almost dipped back below today, the Dow broke the 11,000 mark earlier this week.  This psychological barrier will impact the M&A market since there is a strong correlation between the equities market and M&A, with M&A lagging a bit.

I continue to expect an increase in deal making, with the biggest growth to be hitting in mid-2011.  Companies are now gearing up for deals which take some time to get into place, but with a strong stock market, burgeoning balance sheets, and historically low costs for debt, I see the market starting to brew.  I still maintain you should keep your seat belt on because I fully expected non-participants of the M&A market are going to be shocked at how their competitors radically change over the next 12-24 months.  Many companies will be left eating dust while others blaze a new growth path.

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It seems that in the world of private equity, middle-market funds are enjoying the greatest success in this bleak deal-making landscape.  The main reason given:

…small and middle-market firms are getting the attention of the PE shops because they can be had without piling on gobs of debt

Right now, they are also considered a relative “bargain” in the marketplace.  Despite the uncertainty surrounding the economy, there are still deals to be had.  PE funds with cash and who deal with smaller to mid-size banks not burdened by the troubles of the larger institutions are see opportunity - and are pouncing.

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It’s been a dramatic time for investment banking, and many people are anxious. We probably haven’t seen the bottom yet, but there’s no cause for panic. In fact, good things may come from this latest turmoil.

Take Lehman, the smallest of the four majors. They had tremendous exposure to real estate and their balance sheet was not particularly strong. Perhaps they could have weathered the storm but as so often, perception is reality. The perception here was that Lehman couldn’t pull through, and that made it very difficult for them to raise funds or attract new clients, so they went down.

Now the strong players smell blood in the water, and they are ready to seize on weaker prey. We see Merrill Lynch bought by Bank of America — it’s quite a shakeout. The negative in all this is a reduction in competition among the white shoe investment bankers. But there are positives, too.

We are seeing a breakdown in the old, stodgy way to doing investment banking. We can expect tighter regulation and more transparency in the markets. Clients will have a stronger hand in buying the services they want, rather than being forced into bundled products. More excitingly, I anticipate a new wave of creativity in the capital markets. Look out for new derivatives, greater fluidity, perhaps more tapping into foreign debt or alternative markets like AIM.

As a subsidiary of Bank of America, Merrill Lynch becomes part of a giant, and giants are inherently slow movers. So there are opportunities opening up for smaller, swifter niche players. Of course, there is pain in the transition, and the picture is by no means rosy. However, once the storm has passed we can look forward to new, fresh growth. 

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If you look at the divide in the M&A market, the growth you will see is in strategic acquisitions — either very large or very small. Where we can expect the least amount of activity is what I call the wedge: $1B to $10B transactions. This market sector is inherently ripe for private equity. It tends to be less strategic, much more financial, because in today’s environment transactions on this scale are an odd size — they’re not huge but they’re by no means mom and pop.  Historically, the private equity players in the financial world would acquire a company in that category and build on it as a platform. They would make a $7 billion acquisition and use it as a platform to build around, creating a bigger company that they can take public or sell to a strategic buyer through a private transaction.

But of course, not much of that is happening right now. The private equity folks are sitting on the bench for one simple reason: credit. This middle sector — the wedge — is where the credit situation is felt most strongly. So this is where you’re not going to see much growth.

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