The dealmaking landscape continues to be overshadowed by uncertainty. Major bank failures, the Russia-Ukraine war, high interest rates, and the continued rise in inflation have dwindled and caused a slowdown in M&A deals. The total value and overall number of deals announced in the first quarter of 2023 were lower than any recorded in 2022. However, with all the uncertainty in the M&A market, there remains some optimism regarding equity markets.
Buyers are in a unique position to take advantage of the current market. Equity prices in many sectors are below those reached in 2021 and 2022. Acquirers have the opportunity to look beyond not only cost efficiencies but revenue opportunities and business growth, considering how they can expand their offerings, customer segments, and services over time with the addition of new businesses. Additionally, private equity firms have plenty of access to capital as their dry powder remains near record levels, and financial sponsors can leverage their capability to execute additional deals to increase the size of portfolio companies.
Higher commodity prices are also leaving companies with more cash to make strategic decisions and rely less on acquisition financing, which has become a less popular option in the dealmaking space due to high interest rates. Companies with an increased cash flow are uniquely positioned to evaluate their business strategy and recognize where an acquisition could be transformational to their future.
Long-term structural changes and recent shocks are also influencing healthy organizations to take advantage of the current market and make strategic portfolio moves, including the rapid implementation of AI and the increased importance of sustainability. Growth-oriented businesses that are able to recognize value-added acquisitions can make bold moves that will be transformative to the overall profitability while also actively divesting assets that are no longer lucrative to their long-term strategic plan.
While private equity has seen a sharp decline over the last year due to higher interest rates and more significant restrictions on exiting, their pullback provides an excellent opportunity for corporate acquirers. The reduction in competition from PE has made deals more attractive to strategic buyers, opening the playing field and enabling them to create greater harmony amongst business units and spur the potential for new innovative growth capabilities.
Macroeconomic uncertainty coupled with lower-growth periods can provide various opportunities for sellers and buyers alike. Taking the time to examine operations can enable business owners to recognize what additions or spin-offs are necessary to take their company to the next level. It can also motivate sellers to realize gains they can make through M & A.
While many expected that M&A dealmaking activity would return to more normal levels by the middle of 2023, a variety of factors in the economy have delayed this from happening. However, buyers and sellers may still be able to make decisions that could positively impact their business’s future growth and profitability.
The Aberdeen Team strives to help business owners identify and prioritize their objectives with respect to their business, their employees, and their families. If you’re a profitable business that wants to learn more about your options regarding M&A, reach out to us for a free consultation.