Global & European M&A Update
Global M&A activity decreased in the first quarter of 2023, with deal value dropping by 32.2% from its peak in Q4 2021 due to weakening macroeconomic conditions and a banking crisis.
Despite this decline, dealmakers managed to achieve almost $1 trillion in deal value, largely due to heavily discounted prices in the sub-$100 million size range, which comprises the least expensive part of the market with a median enterprise value (EV) to revenue multiple of 1.1x, a 31.3% discount compared to the global median (TTM) revenue multiple for M&A.
As private equity (PE) firms were reluctant to sell portfolio companies at lower prices, founder-owned businesses filled the void, making up 85.3% of sellers in the M&A market in 2023, an all-time high, and exerting downward pressure on the median purchase price multiple. The downward pressure can be seen in PE-led deals, where multiples have finally collapsed, with the median multiple now standing at 1.7x revenue, primarily involving founder-owned targets in the sub-$100 million segment.
Lower valuations now available to PE and corporate buyers have helped prop up deal flow, pushing quarterly deal flow to pre-COVID-19 levels, up 37.9% by count, on par with the 12 quarters spanning 2017 through 2019, which were considered very good quarters and years for M&A.
Looking closer to ‘home’, the European M&A market saw a slight reduction in Q1 2023, but it remains in line with pre-pandemic levels. There were an estimated 4,555 M&A deals, down 4.3% QoQ, and M&A deal value dropped to $383.6 billion, down 10.7% QoQ. Q1 2023 was notable for some global non-confidence moves in the banking sector in March, with the collapse of SVB in the US and the takeover of Credit Suisse in Europe challenging the solvency of global banking.
A doomsday scenario seems to have cleared thanks to the respective regulators stepping in. In Switzerland, Credit Suisse fell some 99% from its peak share price, and within a few days, the Swiss regulator forced its arch-rival UBS to purchase the bank for a symbolic $3.2 billion to avoid another bank collapse.
The European Central Bank (ECB) and the Bank of England (BoE) increased interest rates to tackle elevated levels of inflation, with the ECB twice hiking rates by 50 basis points in Q1, taking the benchmark interest rate to 3.0%, and the BoE increasing by only 25 basis points the second time around. The UK base rate stands at 4.25% as of the end of Q1.
These moves present a challenging environment for dealmakers and have contributed to lower levels of M&A deals at the start of 2023. Higher interest rates have caused borrowing costs to soar, making it costlier for sponsors to finance their M&A deals.
The tighter credit market has also impacted the multiples sponsors are willing to pay, and there has been a stronger decrease in multiples in Europe compared with the US. The European M&A market continued to benefit from cross-border deal flow, with North American buyers accounting for 21.2% of all European M&A value and $100.8 billion net flow in favour of Europe, setting a 16-year high in 2022.
However, since then, the dollar has retreated by more than 10%, and cross-border activity between North America and Europe has slowed significantly in both directions, down 38.4% and 45.7%, respectively.
There remains healthy interest in UK companies, in part from large strategic buyers various European and Scandinavian countries, and also a wide body of strategic and financial sponsors from within the UK itself.
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Thank you to Pitchbook and their insightful market data.Tags: 2023, boom, European, Global, M&A, M&A Update, PitchBook, Q1 2023, valuations