Overall, deal flow indeed slowed in Q3. However, there are reasons to be optimistic, even in the rocky global economy. For one, deal flow slowing is more about returning to pre-pandemic levels. In the US, categories such as B2B media and information services, marketing technology, and ecommerce are pacing toward 2019 deal flow with an even greater total enterprise value (according to Pitchbook).
Turbulence in the global economy and the public market slowing is also creating a unique opportunity for strategic buyers that have seen heavy competition from private equity (PE) firms and overall valuation inflation over the past couple of years.
- The market slowdown is not universal: It is important to remember that unemployment in the U.S. is near record lows. Strategic buyers on the hunt for growth can still find it. Consumer demand in the U.S. is a complicated formula of necessity, pent-up demand from the pandemic, and inflation’s impact on consumer price points. In that formula, growth opportunities exist.
- Private Equity slowing: The reversal of public markets and the increased cost of debt is leading to a slowdown in leveraged buyouts. This reduces PE competition for strategic buyers who can creatively sidestep highly leveraged acquisitions.
- Equity-based deals: With valuations coming back to reality, equity-based deals will have more attraction for sellers in that the upside potential is greatly increased as public and private market valuations start to climb their way back to pre-pandemic levels.
- Currency fluctuation discounts and hedging: For U.S. buyers, there is a unique window of disparity between the U.S. Dollar and the British Pound. This creates a unique opportunity for U.S. buyers to achieve a discount on the overall valuation brought by the exchange rates. For U.K. buyers with capital reserves and equity upside, buying right-sized U.S. companies presents an ability to infuse more U.S. Dollars into the balance sheet and capitalize on U.S. market size and growth while overall valuations are reduced.
This opportunity for strategic buyers is not perpetual, and buyers need to seize on the opportunity.
- Buyers should not expect that the USD/GBP ratio will hold, with most consensus estimates saying that the disparity will peak in early 2023.
- Seller demand is still backlogged from the pandemic, and a company’s success, or lack thereof, through the pandemic represents a unique diligence opportunity to pressure test their leadership potential, their operational discipline, and their growth strategy through turbulent times.
- Lastly, data shows that weak economy deals outperform strong economy deals. According to research by BCG, “deals made in a weak economy created more value for buyers than those made in a strong economy. Boldness pays off—the outperformance is largely driven by acquisitions outside the buyer’s core business segments. And, although occasional buyers create value through acquisitions in weak economies, experienced buyers outperform by a wide margin.”
If you are a strategic buyer, now is a great time to not only find reduced competition but to have a greater likelihood of success upon close.
WY Partners offers specialist M&A advice to businesses who are seeking to either buy, sell or raise investment at the intersection of media and technology.
Contact Dustin Engel at firstname.lastname@example.org if you have any questions or wish to discuss anything further.