The value of mergers and acquisitions (M&A) globally dropped 36 per cent last year to a 10-year low but executives remain confident for dealmaking in 2023, a new report from Bain shows.
The report, which was released today, shows that M&A, particularly mega-deals worth more than $10bn, slumped from June 2022 after five months of pre-pandemic levels of dealmaking at the beginning of the year.
Median deal multiples globally fell to a 10-year low of 11.9 times ebitda in 2022, off an all-time high in 2021, with the largest falls coming in the technology and healthcare and life sciences sectors.
Valuations typically find a floor at around nine or ten times enterprise value to ebitda, Bain reported.
The year’s turning point was an interest rate hike from the US Federal Reserve in June – the first of four consecutive 75 basis point increases – which “put a chill on the deal market”.
The volume of deals remained slightly more consistent, dropping 16 per cent. The executives surveyed said they anticipate closing a similar number of deals in 2023.
The executives were also confident in the ability of dealmaking to create value going forward, reporting that nearly two-thirds of acquisitions completed in the previous three years have met or exceeded expectations.
Bain expects the majority of deals in 2023 to be valued at less than $500m. These smaller deals will be easier to finance than larger deals given their lower risk, lower reliance on financing and lower exposure to regulatory scrutiny, it said.
“A high interest rate environment and weak economy put a premium on assets with cash flow and a line of sight to rapid synergies,” the report noted, but suggested there were plenty of opportunities for dealmakers.
The recent history of economic downturns “supports confidence in M&A strategy”, the report said. Assets are cheaper and opportunities exist to strengthen core business or create strategic options via scope deals, the report suggested.
“History tells us that companies making bold moves during times of turbulence tend to win over the long term,” Les Baird, head of Bain’s global M&A and divestitures, said.
Bain analysed the M&A activity of nearly 2,900 companies during the 2008-2009 downturn, finding that those who were active in M&A outperformed those who did not, measured in terms of shareholder return.
“Based on what we know from past economic down cycles, we anticipate ample opportunity in 2023 for well-prepared acquirers to make bold, strategic moves. In our experience, we’ve found that in the face of uncertainty, proactive, deeper due diligence can deliver a competitive advantage in the speed and quality of deals done,” Baird continued.