M&A Activity Plummets in 2023: How concerned should Investors be?
Mergers and Acquisitions (M&A) activity can provide a useful snapshot of the economy overall. It offers clues into both private and public markets and even the crossover between the two. Digging into the trends of M&A activity can help investors form forecasts on important concepts like the level of business confidence (or lack thereof), ease of price discovery, and ability to achieve growth targets. As M&A activity fell off a cliff in the first half of 2023, this insight will review the first half of the year and provide an outlook for the remainder of the year.
M&A Activity is down nearly 40% in the first half of the year compared to the same period in 2022, reverting back to the level of M&A activity that we last saw during the first half of 2020, amidst the early days of the Covid pandemic. This drop-off has been led by an extreme slowdown in private equity-led buyouts which have dropped 59% on a year-on-year basis, based on research by Dealogic.
Global M&A Activity - H1 2023
*2023 data through June 27.
Source: Dialogic | Reuters, June 28, 2023 | By Vincent Flasseur
Source: Global mergers and acquisitions plunge in second quarter, dealmakers see green shoots | Reuters
There is an obvious answer when you consider the slowdown in M&A activity. The Fed’s increasing rates have made financing M&A activity much more expensive and due to these higher expenses, many deals have not been executed because the economics are not as compelling after factoring in higher interest expenses. But higher rates aren’t the only contributing factor. Lack of confidence in the economic outlook is another important factor; an acquirer is typically less likely to attempt an acquisition if they are uncertain about future financial performance or if they believe there is a high probability of a better price existing in the near future. Using the OECD data for business confidence, investors can see that overall business confidence has largely trended in line with M&A activity. It follows that M&A activity can be a useful indicator to consider when gauging the overall health of the economy, although it certainly should be considered along with other indicators to get a full picture.
Business Confidence Index (BCI)
Amplitude adjusted, Long-term average + 100, Jan 2008 - Aug 2023
Source: Leading indicators - Business confidence index (BCI) - OECD Data
M&A activity in 2023 has largely been add-on deals, that is, companies being acquired to be added into a larger business platform. For example, a large national car wash operator purchasing a smaller regional chain of car washes as part of an add-on acquisition. M&A was down 41% in terms of dollars and 5% in terms of deal number, this shows that there have been few large deals and instead these smaller deals have dominated M&A activity. A recent report from Pitchbook further confirms the forgoing, as add-ons have grown to a multi-year high of 75% of overall M&A activity within private markets.
Add-ons grew into a bigger share of US buyouts in H1 2023
*As of June 30, 2023
Source: PE firms fund add-ons with equity under tight lending conditions | PitchBook
This development is not entirely surprising. During times of economic stress or uncertainty, add-on acquisitions can be a great way for maturing companies to continue to show growth and hit targets put forth by their investors when organic growth is hard to come by. Additionally, for founders that are looking for a liquidity event, being acquired by a larger platform is a beneficial option to generate liquidity while the IPO market activity stays slow.
M&A activity is trending upward as we move into the second half of 2023. While still relatively depressed , second-quarter deal volume climbed 22.6% over Q1 2023 according to research from AON. Within private markets, valuations have come down meaningfully, especially within tech, making M&A activity a more attractive option for some. Valuations could be a compelling catalyst for further M&A activity which may cause consolidation within industries and power growth for the overall economy. As M&A activity increases, it is reasonable to believe that this is a result of business confidence and overall clarity in the economy increasing. While it would be easy to debate whether M&A activity is a leading indicator, there is no doubt that increasing M&A activity is the result of a healthier market where price can be agreed upon and financing costs are not prohibitive.
Changes in Valuations Vary by Industry
Notes: Data as of announcement date; strategic M&A deals (which includes PE exits) and add-ons, and excludes VC, PE, and SPAC-sponsored deals.
Source: Dealogic as of June 13, 2023
Source: M&A Midyear Report 2023: It Takes Two to Make a Market | Bain & Company
Alternatives factor into M&A activity in a number of ways. Merger arbitrage is a popular strategy within multi-strategy hedge funds. They attempt to generate profits by taking short positions in the acquiring company and a long position in an acquisition target. When executed properly, the arbitrage strategy can generate positive returns whether or not the acquisition is made. M&A activity is a large part of the private markets ecosystem, from the add-on acquisitions that we covered in the previous section to larger mergers made by large buyout firms. M&A can be a key lever for private market managers trying to unlock value.
M&A activity is an important component of modern markets. These transactions can unlock value and power growth in public and private markets. Crystal Capital Partners offers financial advisors and their clients the opportunity to partner with many managers that leverage M&A to generate returns and if we see M&A activity pick up during the second half of the year, these managers will likely have more opportunities to invest.
- Global M&A activity plummets in 2023 (axios.com)
- M&A Midyear Report 2023: It Takes Two to Make a Market | Bain & Company
- PE turns to add-ons with large LBOs out of reach | PitchBook
- PE firms fund add-ons with equity under tight lending conditions | PitchBook
- Global mergers and acquisitions plunge in second quarter, dealmakers see green shoots | Reuters
- 2023 Risk in Review | Aon
We work with many hedge funds that are active within M&A arbitrage and private markets managers that engage in M&A to grow their portfolio companies.
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