The M&A statistics for the third quarter of 2009 are in and show the vast majority of the deals getting done are strategic.  The economic crisis and concerns over deal financing continued to significantly hold down the number and value of deals when compared to the same period last year.  Today, a Wall Street Journal article by Peter Lattman reports that leverage is out and equity is in.  Although these numbers are grim, there is reason for hope.  A number of big name deals, such as Kraft-Cadbury and Disney-Marvel, have injected the market with some much needed optimism.  These types of deals are evidence that strategic deals are going to lead the way to recovery with private equity to follow – not the other way around.

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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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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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