Why M&A volume and value are diverging—and prices aren't in sync with public markets
July 29, 2023
This week, we published our take on the global M&A market at the halfway mark of the year. A few key findings:
While trading multiples have rebounded, deal multiples continue to slide. In fact, we are all the way back to the 100%+ premiums that ushered in the take-public wave of 2020-2021.
At some point, this gap between cheap private markets (90% of all M&A are private deals) and rich public markets should force a slow re-opening of the IPO window, but for now, investors are still healing from the wounds inflicted by the last listing cycle.
As for the M&A market itself, deal value drifted lower in Q2 even while the number of announced or completed deals flirted with near-record highs. Deal value fell to $873.4 billion in Q2, down 33.7% on the year.
This divergence between dollar volume and deal count is the byproduct of two powerful and conflicting forces: significantly higher interest rates and the massive cash piles that remain for corporations and financial sponsors.
PE dry powder stands at $1.3 trillion, just 9.7% shy of its all-time high. An even larger cash pile is on the books of corporations. In the US alone, cash holdings reportedly surpassed $5.8 trillion inclusive of reserves held overseas.
While only a portion of this is earmarked for strategic investments and acquisitions, untapped borrowing capacity and stock value easily compensate for the rest.
This tug-of-war between near-record dry powder, pushing acquirers to spend, and tight credit conditions holding them back has resulted in the stalemate we are now seeing consisting of high-frequency dealmaking at smaller sizes and lower aggregate deal value.
Many expect M&A conditions and deal flow to improve next year. Goldman Sachs, the world’s largest M&A advisor, recently reported an increase in its investment banking backlog for the first time in more than a year.
While this includes other business lines, they tend to cycle together as these activities open the liquidity floodgates. Add to this the unspent cash piles on the books of corporates and financial sponsors, and you have the pre-conditions for a strong M&A rebound in 2024.
For more data and analysis, read our Global M&A Report.
- Purchase price multiples are in full correction mode. We are now down roughly 20% from the 2021 peak (-24% based on revenue multiples, -16.2% using EBITDA multiples).
- Acquirers are marking time until headwinds fade with plenty of deals getting announced, just smaller. Call it a stalemate between near-record corporate/PE dry powder and stubbornly high interest rates.
- The result: deal value is down 33.7% YTD but deal count is mostly unchanged as small deals get done.
- PE is no longer quite so dominant as a driver of M&A growth. After 10 consecutive years of growth, PE share of M&A deal count has been trending down for the first time, peaking in 2021.
While trading multiples have rebounded, deal multiples continue to slide. In fact, we are all the way back to the 100%+ premiums that ushered in the take-public wave of 2020-2021.
At some point, this gap between cheap private markets (90% of all M&A are private deals) and rich public markets should force a slow re-opening of the IPO window, but for now, investors are still healing from the wounds inflicted by the last listing cycle.
As for the M&A market itself, deal value drifted lower in Q2 even while the number of announced or completed deals flirted with near-record highs. Deal value fell to $873.4 billion in Q2, down 33.7% on the year.
This divergence between dollar volume and deal count is the byproduct of two powerful and conflicting forces: significantly higher interest rates and the massive cash piles that remain for corporations and financial sponsors.
PE dry powder stands at $1.3 trillion, just 9.7% shy of its all-time high. An even larger cash pile is on the books of corporations. In the US alone, cash holdings reportedly surpassed $5.8 trillion inclusive of reserves held overseas.
While only a portion of this is earmarked for strategic investments and acquisitions, untapped borrowing capacity and stock value easily compensate for the rest.
This tug-of-war between near-record dry powder, pushing acquirers to spend, and tight credit conditions holding them back has resulted in the stalemate we are now seeing consisting of high-frequency dealmaking at smaller sizes and lower aggregate deal value.
Many expect M&A conditions and deal flow to improve next year. Goldman Sachs, the world’s largest M&A advisor, recently reported an increase in its investment banking backlog for the first time in more than a year.
While this includes other business lines, they tend to cycle together as these activities open the liquidity floodgates. Add to this the unspent cash piles on the books of corporates and financial sponsors, and you have the pre-conditions for a strong M&A rebound in 2024.
For more data and analysis, read our Global M&A Report.
Tim Clarke
Lead Analyst, Private Equity
Tags:
Join the more than 1.5 million industry professionals who get our daily newsletter!