After a steep slowdown during the second half of 2022, M&A activity will likely pick up in the coming months – if history is a guide. The macroeconomic headwinds that have curtailed activity will likely persist during 2023 but M&A volume may rebound nonetheless. Geopolitical turmoil, rapidly rising interest rates, and the economic slowdown have made companies wary of overextending themselves; but if past downturns are predictive, such pessimism will be quickly replaced with appetite as lower valuations make targets more enticing.
This trend has played out in recent downturns: the tech boom of 1992-2000 following the 1990-1991 recession, the financial megadeals of 2002-2007 following the dot com bust of 2001, and the “long recovery” era following the great recession of 2008-2009. According to PWC’s analysis of the 2001 recession, for example, companies that make acquisitions during downturn saw better shareholders returns than their industry peers who waited.
Surveyed industry insiders agree, “with 40% of middle-market companies indicate they are currently involved in selling activity or open to considering it in 2023, identical to the 2022 survey and up from the pandemic low of 33% of companies. Meanwhile, 53% of companies identify themselves as current or potential buyers, up from 45% last year,” according to a Citizen’s Bank survey of middle-market companies currently engaged in or open to M&A, as well as private equity firms focusing on the middle market.
Similarly, Willis Towers Watson predicts, “The fundamentals that drive dealmaking are still in place and, with valuations moderating after the historic levels reached in 2021, strategic and financial buyers alike will take advantage of better-priced opportunities for growth.” WTW predicts that companies will be enticed by “lipstick” deals, where companies focus on smaller deals and selling off non-core assets during a tough operating environment rather than the blockbuster M&A deals of 2021.
According to Matterhorn’s comprehensive M&A database, which harnesses AI to track current and historical deals, this trend may be already panning out. While the median transaction value was $2.5 billion during the first half of 2021, and $1.9 billion during the second half of 2021, that figure sank rapidly to $601 million in the first half of 2022 and $399.5 million during the second half of 2022. History suggests this value will soon rise again as those companies best weathering the economic storm seize this opportunity to acquire targets at lower valuations.
The start of the next M&A boom may be underway.