Mergers and Acquisitions Report 2023

Continued high interest rates, persistent inflation, and recession fears drove the global mergers and acquisitions market to experience another slowdown in 2023, with deal volume reaching its lowest point since 2009. Specifically, the total value of announced deals in the lower middle market for 2023 decreased to $268.9 billion, marking a 22.6% Y/Y decline. Similarly, the total volume of deals fell to 10,918 in 2023, a 20.2% decline from the previous year. However, it should be noted that although deal volume decreased to 2009 levels, the average transaction value remained strong and increased 120.2% over the same time period, with a 4.6% growth over the past year.

Buyers

Strategic buyers once again lead the way, accounting for 89.0% of all transactions, an increase of 0.5% from 2022. Financial buyers also remained active, utilizing different strategies such as rollovers and seller financing to bridge funding gaps. Domestic buyers continued to dominate in 2023, representing 92% of all transactions, with the U.S. experiencing a slightly milder decline in activity compared to the global M&A market.

Industries

The most active industries in terms of volume in 2023 were industrial (27.2%), consumer (18.1%), and information technology (15.4%), making up roughly 60.6% of total volume and 30.1% of total deal value. Although deal volume within the financial industry constitutes a mere 12.7% of all activity, it is noteworthy that it accounts for 39.5% of total deal value in the lower middle market, leading all industries. Some of the most notable Midwest lower middle market transactions in 2023 included SPX Technologies’ acquisition of ASPEQ Heating Group, an electrical heating solutions provider based in Missouri, for $418M and Honeywell’s acquisition of Compressor Controls Corporation, a provider of turbomachinery control and optimization solutions for $670M.

Multiples

Continued economic headwinds had an adverse impact on median multiples in 2023. In aggregate, the available public data reveals a decrease in median EBITDA multiples in 2023 to 8.5x, representing a decline of 1.4x from the previous year. Despite the decrease, multiples were showing signs of stabilization in the latter half of 2023.

Debt

According to GF Data, average debt multiples gradually decreased in 2023 to 3.6x compared to 3.9x in 2022. Average pricing on senior debt increased rapidly from 4.7% in Q1-2022 to 11.3% in Q4-2023, tightening the spread between subordinated debt at 11.9%. Smaller deals in the $10 to $25 million TEV range continue to be funded with more debt, 46.4%, compared to deals over $25 million TEV, whose debt levels ranged between 32.6% and 37.8%.

Forecast for 2024

Despite the sluggish M&A activity observed in 2023, dealmakers are optimistic for a resilient 2024. The conclusion of the Federal Reserve’s hiking cycle and the availability of substantial amounts of dry powder from financial buyers suggests the potential for a recovery from the lows observed in the past eighteen months. Pent-up demand, creative deal structuring, and cash-flush businesses could fuel activity in 2024. However, the upcoming presidential election may cause some companies to exercise caution and hesitate to enter the market. Smaller deals of healthy, resilient companies continue to lead the way, given the higher cost of capital and anti-trust concerns faced in larger transactions.

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