Looking Back to Look Forward at the State of M&A Deal-Making

Looking Back to Look Forward at the State of M&A Deal-Making

As summer ends, it’s a good time to take stock and review M&A activity so far in 2023 and what is on the horizon for the rest of the year… and beyond.

Some industry reports indicate that due to interest rates and the still-ongoing repercussions from the failure of Silicon Valley Bank there is a lot of uncertainty among deal-makers. As a result, there has been a slowdown.

But as Allied Advisers put it in their recent report, Navigating M&A in Uncertain Markets, these conditions have also paved the way for “a rebound in M&A volume and value in the later part of 2023 and especially for 2024.”

This comes on the heels of a slowdown in deal-making in 2022, which, in many ways, was inevitable. And its impacts are still being felt today.

As I wrote back then:

“Granted there has been a decrease in the pace of M&A activity when you compare 2022 to 2021, but that’s not a far comparison, as last year we saw record-breaking deal-making thanks to pent-up demand for deals as we emerged from the pandemic.”

In other words, the slowdown in 2022 was the result of the fatigue that came with the frenzied deal-making post-pandemic in 2021. If you’ll remember the M&A world was just crazy 2021, with transactions going at an unsustainable pace… and asking prices unsustainable too. (Although after the pandemic slowdown, many Buyers were ready to pay top dollar.)

It all resulted in that “pause” in 2022, which was also brought about by rising interest rates and uncertainty among banks. Once that pause from Buyers started, demand dropped. And that results in the prices of target companies coming down.

Buyers sensed that trend and simply let the market rebalance before making any offers. They were not losing by waiting, especially with the high prices set by Sellers. Buyers also were expecting that rising interest rates and the Silicon Valley Bank failure would make Seller nervous, resulting in a surge of distressed business on the market.

However, on the flipside, Sellers didn’t feel distressed at all. They didn’t panic. They just waited.

Where We Are Today

As time has gone on, these trends have seen prices rebalanced… in the Buyers’ favor. And I contend that we’re going to see Buyers come out of the woodwork and start engaging again.

In particular, I see Strategic Buyers, who have a bunch of cash on hand, looking to capitalize on prices coming down and make their moves. Strategics have also concluded growth through acquisition will beat organic growth in the near term.

But Private Equity is right there with them. As I’ve been saying for years, they have a lot of dry powder. But this has been super-charged because of the current environment, where they haven’t been spending it because they didn’t want to get taken in by the unreal demand and overpay for an acquisition.

Now that prices have dropped and valuations have become reasonable, and their investors are pressuring them to do something with all the cash they’re sitting on, PE’s are getting back in the game.

Specifically, I expect the lower middle market to see tremendous activity on two fronts.

  1. Buyers are looking for lower-priced add-ons. Rather than risky, high-priced acquisitions, they are looking for simpler, cheaper add-ons to increase their revenues.
  2. Buyers are also looking for lower risk acquisitions in general. And with valuations coming down, they can buy the same companies that previously had much higher asking prices.

What’s interesting about this phenomenon is that transactions that would have been a fit for traditional Buyside Representations and Warranty (R&W) insurance have now slipped down into the sub-$30M range. We’re looking at deals that had been in the $35M to $40M range just a short time ago that are now in the mid $20Ms.

That means Buy-side R&W coverage is a no-go.

But that’s where a relatively new, innovative transactional insurance product comes in.

Transaction Liability Private Enterprise (TLPE) coverage is designed to fit a gap in deals that Buy-side R&W insurance won’t cover. This is a Sell-Side policy where the Seller, rather than the Buyer, is the policyholder.

TLPE policies are designed to cover transactions from $1M to $30M to the full purchase price – for a maximum of $20M – at a cost that is a fraction of Buy-Side policies.

A huge benefit is that TLPE coverage is easy to obtain, with a simplified underwriting process that carries NO fee. And Buyers like it too, because if they bring a claim for damages, the insurer pays those claims.

If you have any questions or would like to explore the protection TLPE coverage could offer you or your clients, please contact me, Patrick Stroth, at pstroth@rubiconins.com.


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