The news yesterday that Nokia Siemens Networks will purchase Motorola’s network equipment business for $1.2 billion is one sign of an emerging trend in M&A: the increase in midmarket deals.

To be sure, the first half of the year was sluggish for all mergers and acquisitions. A total of 2,969 deals were completed in the first five months of 2010, slightly below the 3,065 for the same time period if 2009 and nearly 40 percent of the 4,754 that were closed in 2007, PricewaterhouseCoopers reports.

However, when you look at deals on a quarterly basis, some signs of improvement in the market are noticeable, according to Towers Watson’s Quarterly Deal Performance Monitor; the Monitor focuses on deals worth $100 million or more. The 94 deals completed in the second quarter of 2010 are a jump of 50 percent from the first.

At the same time, the median deal size was $107 million, compared with $147 three years earlier, PwC reports. That’s one sign that smaller deals have become the new normal, says Greg Peterson, partner with PwC’s transaction services group. Going forward, the sweet spot will be from about $1 billion to $5 billion, with a smattering of megadeals added to the mix, he predicts.

Several factors are driving the expected jump in midmarket deals, says Peterson. For starters, relatively few midmarket deals are financed with high-yield debt; instead, the financing often is based on anticipated cash flows or the company’s assets. Many banks now are in a good position to underwrite such deals, Peterson adds. The folks at R.W. Baird see the same trend, judging from their 2010 Middle-Market M&A Outlook, which states, “… the renewed appetite for large leveraged loans in late 2009 demonstrated that liquidity is increasingly finding its way to high quality opportunities, including in the middle market.”

What’s more, the cost-cutting and belt-tightening that many companies of all sizes have undertaken over the past few years allowed them to stash away plenty of cash. That money also is available for acquisitions. In addition, many companies have slashed costs about as far as they can, while organic sales growth remains elusive, the Baird report notes. That leaves M&A as pretty much the only option for growing both top and bottom lines.

Also, the gloomy financial news from Europe has many companies on the Continent taking a wait-and-see approach, Peterson says. While they do, U.S. firms are looking across the Atlantic for potential targets.

That could be to the acquirers’ benefit, if another trend emerging in the most recent Towers Watson study holds up. Cross-border deals outperformed the market by 5.6 percentage points, compared with a 2.9 percent boost for domestic deals. Typically, the results are flip-flopped, given the greater complexity inherent in cross-border deals. While it’s too early to say if the reversal is a blip or a sustainable trend, it’s clearly a shift worth watching.

Finally, expected tax increases probably will prompt a few deals, particularly on the smaller end of the middle market, among owner/operators who want to sell their businesses and retire. “There’s a general feeling that taxes will go up,” Peterson says, given the deficits the government is facing. In light of that, more than a few individuals are doing what they can to accelerate potential income into this year.

That should be good news for investors. According to Towers Watson’s report, companies that completed deals beat the MSCI World Index by 3.1 percentage points during the second quarter. Moreover, the difference was even more pronounced for deals in the midmarket, given that the largest 25 deals underperformed the market by 10.8 percent. Small and midsize deals swung the number to positive. The reason? “Large deals tend to be slower; slower deals tend to create less value,” said Steve Allen, leader of Towers Watson’s EMEA M&A practice, in a release. With smaller deals, the potential value – or lack thereof – becomes apparent more quickly, enabling the process to move along at a faster clip.

While “good deals come in midsize packages” doesn’t have quite the ring of the original saying, it seems to be true right now. ###