Iain Campbell is a partner of FC Corporate Finance, a mergers and acquisitions boutique serving the mid-market in the UK, Europe and MENA region, operating across all verticals but with particular experience in technology, the IT channel and passenger transport.
In September, I published a detailed article about the state of the M&A mid-market.
As we approach the end of 2023, here’s a brief update on the data and conclusions.
My previous article focussed on the state of the mid-market for M&A, both globally and in the UK, in the first half of the year. Sitting as we now are at the start of December, there are some data and analysis available for Q3, though they are limited. At the time of writing the ONS statistics for UK deal activity had yet to be published.
It won’t be begging the question too much to start by saying that things haven’t got better. I alluded in my previous article to the effect of the Ukraine war on economic confidence. That war continued through Q3 with no sign of an end, now coming into Q4 we have another one in the Middle East. Here in the UK, where only last year it was very much a sellers’ job market for accountants, especially those with advisory skills and experience, all of the “big four” accountancy firms have just announced job cuts, mostly focussed on the advisory side of their businesses (including some in deal advisory), and some have scrapped pay rises and cut bonuses.
Reports and analysis from various sources suggest that between Q2 and Q3 2023 the global M&A market fell around another 20% in deal value and around 17% in deal volume. Pitchbook suggest the decline in deal volume may be overstated and the estimates that the true figure may be much lower (I presume including smaller deals that may not be reported.)
KPMG reported deals in the TMT (“technology, media & telecoms) sector down 17% by volume form Q2 to Q3, though deal value was up 35% driven by Cisco’s announced $28 billion acquisition of the cybersecurity company Splunk.
Here in the UK, BDO’s Private Company Price Index (“PCPI”) data shows deal volume down 15.4% from Q2 to Q3 2023 (a blended reduction of 18.0% in private equity deals and 14.8% in trade-buyer deals. This includes only larger (announced/publicised) private company deals though. There may be a trend in smaller deals that’s materially different, but from what I see anecdotally in our business, I wouldn’t have said so..
As regards pricing, globally Pitchbook reported average enterprise value/revenue multiples moving up slightly from 1.5x in Q2 to 1.6x in Q3, but the trend varied from sector-to-sector. Pricing multiples in “mega-deals” (ie over $5bn) were up by 60%, multiples in small deals (under $100m) were flat, financial services and B2C multiples were up but energy, healthcare and materials/resources were all down. Average revenue multiples in the IT sector were down 7.4%.
In the UK, EBITDA multiples in BDO’s PCPI were down only 2.0% from Q2 to Q3 for trade buyer deals, and down about 4.5% and pricing in private equity deals.
US interest rates increased further in Q3 with the Fed rate increasing to 5.25% to 5.5%. In the UK, interest rates increased a further 25 basis points in Q3 and may have now settled at 5.25%, though the bank of England has signalled an expectation that they may remain around this level for several years. The high interest rate environment (compared to the previous approximately twenty years of low rates – or fifteen in the UK) means continuing higher debt-service costs and continued constraint on leverage potential in corporate acquisitions. Pitchbook reported that average debt-to-enterprise value ratios globally in Q3 2023 were nearly 16% lower than in 2022.
However, declining deal volumes and values in Q3, particularly those involving private equity, will only have increased investor and acquiror “dry powder” further beyond their already record levels in the first half of the year.
The key takeaways are therefore still the same for now:
- For mid-market deals, we’ve been in a hard market now for the last year or so, particularly compared to the boom years before. If you are seller, especially if private equity will be in the mix in your buyer pool, now probably isn’t a good time to be staring a marketing exercise. Whilst prices (ie valuation multiples) are holding up reasonably well for those deals that are completing, the lack of liquidity in the market is such that it may not be possible to get your deal to completion at the right price, either at all or in an acceptable timescale.
- If you’re a trade buyer and you have cash, now is a good time to look at acquisitions, and if you have historically been acquisitive, now isn’t the time to stop. As I mentioned in my previous article, acquisitive companies who keep on acquiring through poor market conditions have been shown significantly to outperform those who pause their acquisitions programmes.
- If you are a seller and you are going to start a process challenging market conditions notwithstanding, and especially if private equity is in the mix, you mist be prepared for a more rigorous process, probably with fewer bidders and almost certainly with extra rigorous due diligence.
- The dry powder issue combined with pent-up seller exit appetite will inevitably drive the return of a more liquid market, albeit that funding structures might have to evolve and this may move market pricing down a little. (That’s something that’s worth thinking about though if you get an approach at a good price now.)
- If you are a seller you should be preparing for improved market conditions, possibly as soon as next year, and addressing the issues I raised in my previous article including:
- Your strategic roadmap and business plans;
- Your own acquisitions pipeline (if this is a key part of your model and value proposition);
- The strength and depth of your management team;
- Creating/updating a dynamic virtual data room;
- Lining up your sell-side advisory team;
- Corporate governance issues, eg ESG, legal and regulatory compliance, risk management; and
- Reviewing taxation matters to identify and address any problems.
Even more so now, there has never been a better time to prepare, prepare, prepare!
FC Corporate Finance is a UK-based advisory firm. The areas we specialise in include, amongst other things, private company mergers and acquisitions (both in the UK and internationally) in the mid-market and SME space. We have very extensive experience in both “buy-side” and “sell-side” and are intensive and hands-on advisers and process managers through the whole cycle – acquisition strategy, origination, target evaluation, target valuation, deal structuring and negotiation, implementation, due diligence (if required), and detailed contract negotiation through to completion.
In recent years we have been particularly active on buy side, including in the IT distribution and IT reseller space, staffing agency, cleaning, security and other personnel-orientated businesses. We also have internationally-recognised capability and experience in deals in the passenger ground transport industry.
E-mail: ic@fccorporatefinance.com
Mobile: +44 7964 893739
LinkedIn: https://www.linkedin.com/in/iain-campbell-a7a9a126/
FC Corporate Finance Limited is not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services to clients because we are members of the Institute of Chartered Accountants of Scotland. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide. FC Corporate Finance Limited has a policy of professional indemnity insurance with Arch Insurance Company (Europe) Limited of 60 Great Tower Street, London EC3R 5AZ. This policy has worldwide application except in relation to professional business carried on by the insured from its own offices in the USA or Canada.