While recession fears linger and interest rates continue to increase, many corporations are shy of risks and large capital investments.
Combine this with persisting supply chain issues, geopolitical tensions, and extra regulatory and compliance scrutiny, attempts to retain talent, grow revenue, and maintain the minimum status quo remain at the forefront of executives’ minds. These factors, however, present a unique opportunity for well-equipped corporations to embrace M&A as part of their strategy to capitalize on opportunities in an environment with lessened competition, new assets on the market, and a reset in valuations.
As Q2 begins, businesses are looking for opportunities to pursue through the remainder of the year. 2022 began with a slow number of deals as corporations braced for market volatility and focused their capital and other efforts internally. The second half of 2022, however, offered a stark contrast that is continuing into 2023 offering the potential for a return to normalcy.
Although high-interest rates consequently lead to an increased cost of capital, there is an increased M&A appetite for middle market deals utilizing capital deployed from private equity firms within targeted industry sectors.
Middle Market Deals
The segment of businesses with revenue from $10 million to $1 billion comprise the middle market. Despite strategically navigating inflationary impacts by largely passing on increased costs to customers, corporations are optimistic, yet cautionary, about their organic growth opportunities. Therefore, corporations in the middle market expect much of their growth to come from outside M&A activity. In a market that is favoring sellers, high-performing corporations willing to sell will have an advantage in the market as valuations stabilize and demand from buyers increases.
Increased interest rates and high costs of borrowing lead to hesitancy in financing deals. Private equity and venture capital firms, on the other hand, are well-positioned to make a large impact. Recently, private equity firms have become more specialized in the industries and sectors they target. With a record amount of uninvested capital and the desire to monetize their portfolio of investments in the near term, private equity firms are positioned to impact both the buyer and seller environments, bolstering overall M&A activity.
Targeted Industry Sectors
To remain competitive and increase market share, corporations are more likely to pursue targeted sectors and additive acquisitions within their existing core businesses. Industries such as technology, healthcare, and energy are well positioned to drive M&A activity as they face pressures from the global economy, competitive research and development practices, and a desire for scalability. Additionally, as valuations remain in flux, consolidation opportunities, and unsolicited proposals will prove to be favorable. Not to mention the many startups with original plans to pursue an IPO, now repositioning to explore alternative exit strategies.
The Impact of Due Diligence
Although the current market is leaning to favor sellers, it is easy to predict a shift for buyers in the near term. Ensuring finances and operations are well-vetted and accurate, ready to present, and face thorough reviews and increase scrutiny is imperative. The viability of a favorable M&A transaction is dependent on the quality of information available to inform all parties. For the 2023 M&A activity, meticulous reporting of data and insights as well as in-depth risk analysis proves more essential than ever for desirable deals to be made.
In conclusion, while rising interest rates and somewhat unpredictable market volatility put a strain on business finances, M&A activity is expected to remain strong throughout 2023. Well-positioned corporations have the opportunity for growth through targeting deals within core business sectors and utilizing alternative capital funding methods.
Plan for your next potential M&A opportunity by getting started with the Percipio Business Advisors team today. From business transition planning to transaction advisory, our team will collaborate to structure, negotiate, and help you close your transactions and exceed your goals.
Offering Mergers & Acquisitions Advisory:
- Business Transition Planning
- Succession planning
- Business valuation
- Business & process improvements
- Risk mitigation
- Transaction Advisory
- Financial due diligence
- Cash flow and financial modeling
- Business structure planning/business reorganization
- Letter of Intent (LOI) review and negotiation
- Quality of Earnings studies
- EBITDA / Seller Discretionary Earnings (SDE) analysis
- Working capital analysis
- Purchase/sale agreement review and negotiation
- Purchase price allocation
- Post-close due diligence and purchase price adjustments