M&A Summer Outlook 2023
As we enter a well-earned summer break, we now have a good picture of the M&A market courtesy of Pitchbook’s latest review of the global M&A market to the end of June 2023.
As might be expected, we are seeing a marked reduction in the overall deal sizes across the globe. High interest rates are undoubtedly impacting ‘leveraged buyout’s’ (LBO’s) and hence the mega deals are slowing down. But for smaller transactions, the ‘deal count’ – i.e., the number of deals taking place, is largely steady. This is due to the growth in acquisitions by corporations, as opposed to financial sponsors (private equity, VC et al)!
Let’s take a dive into the numbers.
The global M&A market experienced a decline in deal value in Q2-23, despite the number of announced or completed deals nearing record highs. Global deal value fell to $873.4 billion in Q2-23, down 6.5% from Q1-23, making it one of the weakest quarters since the pandemic-induced drop in Q2-20. On a yearly basis, the dollar value of deals is down 33.7%, and there is a 41.9% decrease from the peak seen in Q4-21.
In contrast, the number of deals remains relatively stable, with only a 13.8% decline from the peak in 2021.
This difference between deal volume and value can be attributed to two conflicting factors: significantly higher interest rates and substantial cash reserves held by corporations and financial sponsors. The impact of higher interest rates has been particularly felt by financial sponsors, who rely on floating-rate debt for leveraged buyouts (LBOs). Leveraged loans backing LBOs have seen an average yield-to-maturity of 9.5% in H1-23, up sharply from 6.2% in H1-22. This is partly offset by the significant amount of unspent cash, referred to as “dry powder,” within financial sponsors, amounting to $1.35 trillion, just 9.7% away from its all-time high. But there is no doubt that as leveraged debt inevitably plays a part in any private equity / VC backed deal, higher interest rates will slow things down.
Whilst large deals have slowed down, smaller sub-$100m deals are generally steady. With corporations holding substantial cash reserves, for example US cash holdings surpassing $4.0 trillion and $5.8 trillion estimated to be held in corporations overseas in Q1-23, this is still a highly liquid market with large numbers of corporations looking to acquire.
The correction in global M&A deal prices is evident when considering enterprise value (EV) to EBITDA ratios. Multiples have declined since the all-time peaks in 2021, with the median EV to EBITDA multiple currently at 8.8x for the 12 months ending Q2-23, down from 8.9x in 2022 and 10.5x in 2021. Looking to Europe specifically, this region has experienced a reduction of a peak 10.4x to 8.5x on EV to EBITDA ratio.
Taking a look at the market that we serve, i.e., companies and deals below $100 million in value—discounts emerge, with a median EBITDA multiple at 7.0x, or 52.0% below the median multiple paid for deals above that size range. Multiples fell more steeply in this size bucket, down 19.1% from 2021’s median multiple of 8.6x.
We await further UK data to finalise our view, but from what we see at this point, we can see that valuations are being somewhat tempered in the ‘mid-cap’ space. But whilst valuations have reduced from the highs of 2021, market appetite for acquisitions, particularly within the private company market, remains strong. That is certainly our experience with the transactions we are currently handling.
Here at TheNonExec, we shall be enjoying a couple of weeks downtime, returning to a busy second half of the year with a number of ongoing deals in play.2023, deal size, EBITDA, Enterprise Value, EV, LBO, leveraged buyout, M&A, revenue multiples, Summer