The M&A market right now is a little like a street cart hot dog—hot but cheap. The volume of M&A deals “flirted with near-record highs” in the second quarter, according to PitchBook’s latest Global M&A Report. However, that increase in volume came with a substantial discount: “Deal value fell to $873.4 billion in Q2, down 6.5% from Q1, for one of the weakest quarters recorded since the pandemic-induced free-fall of Q2 2020.”
For financial professionals involved in M&A activity, this could be good news or bad news, depending on whether you’re planning to acquire, or hoping to be acquired. On either side of the transaction, it seems clear that you can get to a deal, so long as sellers are willing to accept lower valuations.
Even setting aside the lowered pricing we saw in the past two years, it’s clear that executives selling their firms need to recalibrate their ideas about what a company valuation looks like. Compared to pre-pandemic pricing, today’s M&A deals aren’t close: “Q2 dollar volume has fallen to 14.8% below the 2017 to 2019 quarterly average,” according to PitchBook. That’s the case even as deal volume is up 28.8% compared to that period. Indeed, PitchBook said, M&A deal prices “are in full correction mode.”
“Two powerful and opposing forces”—“higher interest rates and the massive cash piles that remain on the books of corporations and financial sponsors”—are driving that shift, according to PitchBook. PwC’s recent US Deals 2023 midyear outlook also found that “economic uncertainty and regulatory scrutiny have helped dampen big deals.”
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Finance professionals at acquisition targets should know that the math has changed on M&A deals, with substantial multiple contraction. What had been a “tight band of between 9.7x and 10.5x in the five years ended 2021” when calculating the ratio of enterprise value to EBITDA was down to 8.8x over the past 12 months. Enterprise value to revenue was down even more, from 2.0x at its peak in 2021 to 1.5x over the past 12 months.
With so many indicators for price heading down, there might be a reason to think prices could head back in the other direction: large corporations’ hunger for revenue growth.
PitchBook noted that cash on hand for both financial sponsors of M&A deals and US corporations was near all-time highs.
“With growth in corporate profits having turned negative for several quarters now, attention has turned to buying revenues through acquisition, where it cannot be developed organically,” the report said, suggesting that larger corporations will be eager to find deals where they can.