Private equity firm Ares Capital (ARCC) has inked a deal to acquire smaller rival American Capital (ACAS) for $3.4 billion in stock and cash, the companies announced in a statement today. The transaction strongly positions Ares Capital "as the leading business development company in the U.S. and a leading direct lender to middle market companies." (See also: Mergers and Acquisitions: Doing The Deal.)

According to terms of the agreement, American Capital shareholders will take in $1.470 billion in cash from Ares Capital, or $6.41 per share, plus 0.483 Ares Capital shares for each American Capital share, resulting in about 110.8 million Ares Capital shares or $7.34 per share based on Ares Capital's closing stock price of $15.19 as of Friday, May 20, 2016.  After the deal closes, Ares Capital shareholders will own a majority stake (73.9%) of the combined company while American Capital shareholders will own a minority interest (26.1%). 

The only American Capital asset not included in the transaction is American Capital Mortgage Management LLC, which is being sold to American Capital Agency Corp. for $562 million. 

Ares Capital hails the positive long-term outcome of the deal, saying it will, "create many strategic and financial benefits and will position the combined company to capitalize on favorable market conditions," according to the press release on the acquisition. 

"The growing demand for capital from middle market borrowers has created the need for flexible capital providers like us to fill the financing gap as banks continue to retrench from the market," said Michael Arougheti, co-chairman of Ares Capital's board of directors.  "We believe this transaction materially enhances our presence as a market leading direct lender with the size and scale to capitalize on the attractive competitive dynamics in the market today and for the foreseeable future."

Wells Fargo Securities LLC and Bank of America Merrill Lynch provided financial advice to Ares Capital on the transaction while Goldman Sachs and Credit Suisse Securities (USA) LLC did likewise for American Capital.