2H23 | M&A Update: The Katalyst Report
While 2023 presented challenges in the M&A market, the Katalyst Report sheds light on a brighter, stable future. Our exclusive analysis unveils trends and opportunities for consumer, industrial, and technology companies in the coming year.
As we reflect on the latter half of 2023, the global M&A market faced challenges, witnessing a decline of 11% and 19% in deal size and volume, respectively. Similarly, the U.S. market experienced a 14% dip in deal size and a 28% reduction in volume, primarily attributed to inflationary pressures and rising interest rates, especially for acquisitions exceeding $250 million.
Amid these challenges, the lower middle market (transactions ranging from $10 to $250 million) showcased remarkable resilience, maintaining active deal volumes albeit at declining levels. In contrast to larger acquisitions, these smaller deals demonstrated adaptability by closing with a mix of equity and cash or leveraging existing credit facilities of larger strategic buyers and private equity platform portfolio companies. This unique market dynamic positioned business owners of privately held companies with strong fundamentals to attract multiple offers from savvy buyers.
Strategic corporate acquirers, historically leaders in the market, exhibited a shift in mindset. While they traditionally maintained a 75% lead in annual M&A spend compared to financial private equity acquirers, this lead narrowed to 28% in 2023. The decline emphasized a shift from top-line revenue growth via acquisitions to a bottom-line profitability focus. Regulatory measures promoting efficiency led to layoffs and office closures, with businesses becoming more discerning about their portfolios, resulting in more divestitures in 2023 compared to the previous year. Divestitures are agnostic to M&A and by choosing not to participate, this provides the clue to what happened in 2023. Lastly, strategic acquirers use their own cash and equity offsetting some of the payments with their own stock. With the focus on weathering the anticipated downturn and tightening the bloat from 2021, strategic corporate acquirers are flush with cash as we enter 2024.
Over the past decade, financial buyers, including private equity and family offices, emerged as disruptive forces quadrupling number of transactions and deal spend. Despite challenges arising from an 18-year high in the fed funds rate impacting credit availability, financial buyers, armed with almost $1.3 trillion in dry powder, navigated the downturn admirably. Their robust deal volume showcased resilience, particularly considering the hurdles faced coming into the pandemic.
If anyone was going to sell, 2021 was the year to get it done. The sharp decline in transaction multiples from 2021 to 2023 left an indelible mark on business owners looking to market. This impacted cash distributions to founders, employees, investors, and others, creating a challenging negotiation environment. As we anticipate an increase in M&A spending in 2024, the expectation of pricing compression presents a historic challenge. The bid-ask spread in company valuations is poised to be significant, demanding careful navigation, precise planning, and transaction de-risking for those considering a business exit. This will be a tricky point to navigate in 2024 and beyond.
Inside the report, you’ll discover:
Our analysis on the pivotal role of GenAI investments by strategic acquirers and how that’s going to drive M&A deal volume and spend.
Compelling reasons for business owners to build ventures infused with passion and technology, elevating products, services, and processes to deeply serve customers.
A comprehensive breakdown of recent acquisitions categorized by transaction size across key sectors.
Crucial factors influencing valuations in the current market environment.
Each edition of The Katalyst Report will offer a detailed review of M&A transactions and insights tailored for businesses in the lower middle market. At Katalyst Point, our service focus lies with revenue-generating businesses ranging from $5 to $250 million, with demonstrated or clear path to double-digit net operating margins.
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