M&A Summer Outlook 2022
Here at TheNonExec, our team heads into summer with our busiest period in more than twelve years of business. Our client list continues to grow with around 50% of our work involving international sellers or buyers.
Looking at the previous six months and solely at our sell-side services, we completed one deal and have a further two with signed heads and due diligence completing shortly. We have a further five sell-side transactions in the market over the next six months with a consolidated deal value over £90M.
So, how is a snapshot outlook from an M&A perspective?
Looking out on the financial landscape, after years of cheap money being pumped into the world by the central banks, it is not surprising that we have turbulence in the system. The numbers are huge – the Bank of England alone pumped £895 billion into bonds between 2009 and 2021.
That alone was enough to cause asset speculation and spikes. Covid and war in Ukraine have both clearly exacerbated inflationary effects. Economists, central banks, and politicians are grappling with the double-edged sword of taming inflation and stimulating consumer demand. Not an easy task.
According to the global financial data company, Pitchbook, the European M&A market in Q2-22 has largely returned to 2017 – 2020 historic norms, which typically average $350M deals completed per quarter. The first six months of 2022 generated c. $650M deals completed – slightly behind the norm, but perhaps not unexpected given the bull M&A market in Q1 & Q2-21.
Enterprise Value / EBITDA ratios have fallen to 11.4 x compared to last year’s frothy 14.0 x, but taking a 10-year view, this is back to normal levels (in our view). Of course, this is an average view of EV taken across all deals (small, mid, and large) …
According to Pitchbook, private equity continues to grow its market share of European M&A with more than one in three deals being led by a ‘financial sponsor.’ Despite a volatile backdrop, the forecast is that deals will continue to close, in part due to Private Equity, estimated to be sitting on €2.3 trillion dry powder cash globally.
That being said, with large corporate firms leading the lion’s share of the deal-making, in the short term, they will prioritise managing economic turbulence over M&A activity; so, we expect overall deal making with corporates to be slightly subdued compared to historic norms.
Looking to the markets in general, global equities are slowly starting to bounce back after a fairly tumultuous year to date. In the US, tech stocks are finally seeing an uptick after a 21% drop on the Nasdaq Composite. The UK’s FTSE 100 index (with its largely non-tech focus), is showing a gain of almost 3%. The pandemic clearly shifted the needle in favour of digital offerings – and whilst this remains turbulent, the long-term advances offered by technology will no doubt restore technology equities over the medium-term.
Inflation is clearly top of central banks agenda right now – and much will depend on what medicine is offered to tame it. Whatever happens, the effects of unwinding QE (quantitative easing) will act to reduce money supply. But once global supply chains become more stable, our long-run assumption is that interest rates will stabilise at higher levels than historic norms.
Ultimately, that matters when leverage is high – for both consumers, corporate and indeed governments alike. Our view is that the era of cheap money is coming to a close – and hence highly leveraged deals will diminish somewhat. And of course, for buyers with large cash reserves, the benefits of higher interest rates may change investment appetite for lower yield potential acquisitions.
Or in plain speak – sellers with lower profits may become less appealing to buyers!
(As a complete aside, Turkey has been wrestling with inflation of up to 80%. Despite the government’s unorthodox approach of reducing interest rates as the medicine to solve inflation, real GDP has grown by 11% according to The Economist).
Taking a broad view, we can only pray that war in Ukraine will ease, but in terms of the economy and the world of mergers and acquisitions, the sheer size of liquidity on Private Equity and corporate balance sheets will continue to drive the market in our view, especially in the mid-cap sub $100M deal space.
Which is a very long-winded way of concluding that ‘M&A deals will continue.’
“Don’t Panic. It’s the first helpful or intelligible thing anybody’s said to me all day.”Douglas Adams
Don’t forget that for anyone based in the south of the UK, we are co-hosting an M&A session with law firm Steele Raymond LLP on Thursday 17 November. It’s a short, informative, and perhaps, entertaining outlook on the world of mergers and acquisitions.
Come and join us in person…Tags: due diligence, EBITDA, Enterprise Value, Heads of Terms, sell-side services, Summer Outlook 2022