Looking Ahead - Key M&A Themes in 2023

Strategic acquirers and financial sponsors alike were busy putting capital to work which culminated in a dizzying 24 months of record-setting M&A activity.  However, a valuation correction, which arguably began in the second half of 2022, is expected to carry over in 2023 as monetary tightening and interest rate hikes continue.  As the fight for price stability wages forward, many industry experts predict 2023 transaction activity will be ‘muted’ relative to the past two years, but not ‘decimated’ as witnessed during the Great Recession.

Private Equity acquirers are calibrating market valuations and investment theses under a fresh economic cycle.  Rising borrowing costs, pressure on key equity return metrics, and macro-economic uncertainty is creating a melting pot of ‘noise’ when it comes to business valuations.  Smaller target acquisitions will become more prominent – “add-ons” are generally quicker to digest and integrate and can sometimes be acquired at more favorable valuations while also meeting growth criterion.  Private debt funds, or non-bank lenders, will be a primary source of financing as the asset class continues its meteoric rise and abundant deployable capital (‘dry powder’).  Heightened scrutiny in due diligence – all acquirer-affiliated constituents (investors, quality-of-earnings, insurance, operations, environmental, human resources, legal, etc.) are on high alert taking special care when identifying and allocating the risks between counterparties.

Strategic acquirers to continue dominating the proportion of middle-market M&A activity in 2023.  Corporate acquirers have significant deployable cash on-hand and existing credit facilities after more than a decade of shoring-up balance sheets.  The last two years of cash preservation and debt repayment tactics have further expanded capital allocations to M&A strategies.                Strategic fit, growth characteristics, and cash flow resilience will determine a premium vs. discounted valuation for middle-market businesses.

We anticipate strategic buyers to prevail in most large middle-market company transaction processes, while financial sponsors focus on smaller middle-market businesses that complement their existing portfolio investments.   Premium valuations will be awarded to those companies that are outperforming their peer groups.

Hexagon Capital Alliance has a 23-year history of assisting business owners in planning and executing on their personal and corporate liquidity objectives.  All deals start with a conversation.  We are here to listen then present alternatives to help business owners make informed decisions.