What's Happening?
The current U.S. mergers and acquisitions (M&A) market is characterized by a significant split, with large strategic deals progressing while middle-market transactions face slower movement and increased uncertainty. This assessment comes from a panel
discussion at Faegre Drinker’s annual M&A Conference, featuring experts Callie Grossman, director at Piper Sandler; Megan Winge, vice president at NCP; and Zane Hendricks, managing partner at Midwest Growth Partners. Higher interest rates, market volatility, valuation gaps, and more rigorous due diligence are contributing to extended deal timelines, making closing certainty a critical factor for successful transactions. Businesses with minimal exposure to artificial intelligence (AI) and tariffs are performing better, while those with such exposures face a tougher market. The market has seen an increase in deal value globally at the beginning of the year, but overall volume has decreased. Strategic urgency to complete deals exists, but buyers and sellers are navigating a challenging macroeconomic environment marked by inflation, energy costs, and tariffs. The market is favoring businesses in infrastructure (including data centers), healthcare, and high-skill, low-capital expenditure sectors that are insulated from policy noise.
Why It's Important?
This bifurcation in the M&A market has significant implications for U.S. businesses and investors. The emphasis on certainty and strategic fit means that companies seeking to sell or acquire must demonstrate clear value propositions and resilience against macroeconomic headwinds. For middle-market companies, the slower pace and increased scrutiny could lead to prolonged sales processes or even stalled deals, impacting growth strategies and capital deployment. The preference for AI-forward or AI-proof businesses highlights the growing influence of technology and innovation in valuation, potentially leaving traditional sectors at a disadvantage unless they can demonstrate insulation from these trends. Furthermore, the shift towards private equity needing to generate returns through business improvements rather than just leverage or multiple expansion signals a more disciplined and operational-focused investment landscape. This could lead to more robust post-acquisition integration and a greater focus on organic revenue growth, which is challenging to achieve but increasingly vital for returns.
What's Next?
Looking ahead to 2027, experts anticipate that strategic buyers will be opportunistic, preparing for larger growth in 2028. The trends observed in the latter half of 2026 are expected to continue, with M&A activity, particularly in the middle market, remaining selective. Deals will likely favor businesses with durable earnings, those that are either AI-forward or AI-proof, possess capable management teams, and have clear strategic bids, regardless of whether the ultimate buyer is private equity or a strategic entity. Panelists do not foresee a significant expansion in the overall market next year, citing the less-than-ideal interest rate environment, uncertainty in decision-making and administration, and the impact of past acquisition missteps. This suggests a continued cautious approach from buyers and sellers, with a focus on quality assets and strong strategic alignment. Private equity firms will likely continue to prioritize margin expansion, growth, and add-on acquisitions to drive returns, as evidenced by add-ons accounting for over half of private equity deals in Q1.
Beyond the Headlines
The current M&A landscape reflects a deeper shift in how value is perceived and created in the U.S. business environment. The increased demand for buyers to bring meaningful support beyond just capital—such as operational help, governance, financing resources, and management-team fit—underscores a move away from purely financial transactions towards more integrated partnerships. This suggests that sellers are increasingly looking for strategic partners who can genuinely contribute to their business's growth and scalability, rather than just providing an exit. The emphasis on a seller's cohesiveness and skill set, and the alignment of owners and management teams for a smooth transition, indicates a more holistic approach to deal-making. This evolution moves beyond traditional cultural fit to focus on tangible value addition, signaling a more mature and demanding M&A market where strategic foresight and operational excellence are paramount for successful transactions and long-term value creation.
