M&A Market Update, February 2023

M&A Update February 2023 - M&A Update February 2023

Though M&A activity fell well short of the high-water mark set in 2021, a gradual recovery is predicted in 2023 as excess liquidity drives acquisition growth.

Preliminary M&A Themes for 2023

Interest Rates vs. Dry Powder

  • Borrowing is considerably more expensive due to higher interest rates, with tightening expected to ease by mid-2023
  • Private equity firms are sitting on unprecedented dry powder, which they will seek to use on attractive opportunities

Opportunities in Distressed M&A

  • Difficult operating environment will drive an increase in companies jettisoning non-core assets
  • Some deals will be voluntary while other companies will be forced to sell assets, creating opportunities for buyers to expand product lines, services or supply chains at a reduced rate

Geopolitical Impact

  • Manufacturers have sought to mitigate global supply chain risks, particularly through nearshoring
  • Supplement platforms  to  boost  operational  resilience  to weather macroeconomic challenges

Recessionary Fears May Hinder Potential Buyers

  • Yield curve inversion typically suggests an incoming recession, though many believe it may presage waning inflation
  • Buyers increasingly focus on smaller, more affordable deals, versus large scale acquisitions, due to economic uncertainty

Due Diligence Remains a High Priority

  • Higher borrowing costs make it more important than ever for buyers to take an even deeper dive into examining targets
  • Targets will need to be prepared, with financials and operations ready to face greater scrutiny
Deal-making tailwinds and headwinds 02-2023 - Deal-making tailwinds and headwinds 02-2023

Recent M&A Developments

2022 Lower Middle Market M&A Activity Rises Year over Year

  • In 2022, deal activity on lower middle market M&A platform Axial reached nearly 10,000 marketed deals
  • That figure represents a 32.2% increase from 2021
  • Industrial deals represented the largest percentage of deal flow at 28%
  • Technology, consumer goods, healthcare, and business services also made up significant chunks of deal flow at 15.2%, 14%, 12.1%, and 8.1% respectively

High Interest Rates require Creative Deal Structures

  • In 2022, deal value fell 37% from 2021 from $5.7 trillion to $3.6 trillion in part due to  a pullback by large investment banks from the leveraged loan market
  • Due to rising rates, banks lost hundreds of millions of dollars on leveraged loans which curbed their appetite for further lending
  • Consequently, buyers have been increasingly utilizing 364-day lending facilities and other bridge loans to finance their acquisitions
  • Acquirers have also been minimizing financing costs by negotiating for minority stakes as opposed to majority ownership positions thus avoiding the need to refinance the existing debt at a higher interest rate

A survey of 400 middle market company executives revealed a positive outlook for 2023

  • Valuation and company performance outlooks are positive, but to varying degrees depending upon the sector
  • Nearly 2 out of 3 companies believe that M&A will be the primary driver of their growth in 2023
  • Both PE firms and companies believe that sellers have a slight advantage given the current market conditions
  • Deal confidence is down due to broader macroeconomic uncertainty, but there remains a strong pipeline of both  buyers and sellers
Value of Mergers and Acquisitions Globally - Value of Mergers and Acquisitions Globally

Monthly Summary

Picking up on where it left off in 2022, the Federal Reserve announced another 25 basis point increase. The rate comes on the back of 2022 when the Fed raised rates 7 times from .08% to 4.25%. In his latest press conference, Fed chair Jerome Powell conveyed a “slightly dovish” tone to Analysts. He indicated that the Fed would sit tight and allow the economy to catch up to its policy. Analysts also interpret the reduction in rate hikes from 50 and even 75 point increases to the 25 point increase as an acknowledgement that the central bank is more confident that its policy is manifesting its intended consequences. The increases in rates have been aimed at taming inflation, as the Federal Reserve has been trying to balance the reduction in inflation while trying not to send the economy into a recession. The tone from the latest meeting, as well as encouraging economic data, and a reopening of China seems to be contributing to a more positive economic outlook. Entering 2023, both company executives and dealmakers are more optimistic for a strong 2023 than they were previously as the uncertainty surrounding the economy begins to subside.

Sources: Paul Weiss, Axial, Goldman Sachs, Wall Street Journal, CNBC, Citizens Bank

Skip to content