What’s Your Take on M&A into 2024? We’d Like to Know.

Just as dealmakers were adjusting to the inflationary, volatile stock market and high-interest rate environment, war and geopolitical fears have arrived to extend 2023’s uncertainty in M&A markets.? As the more important human and national security impacts of the war sink in, sellers, buyers and intermediaries will need to deal with the business and deal impact.? Much of the current environment feels familiar to older deal professionals, but there are different dynamics at play that, as always, will reward creativity and turn complexity into opportunities.? Let us know your take on what we’re hearing and seeing (below) – either via a Linked-In comment or email to me at [email protected].? We’d greatly appreciate your input, including corrections, push back and different opinions.

1. Will Corporates Get More Active as PE Pulls Back?? Corporate buyers flush with cash may become more active buyers as they see less PE fund competition.? Corporates can pay higher prices given their long-term hold, technology-enhancement and supply-chain de-risking (“on-shoring” and “friend-shoring”) strategies.? And corporates may do more carveouts of non-core assets to address stock market volatility, geopolitical risks and supply-chain issues.? Corporates can not only pay more with less leverage, they are also able to close deals more quickly.? Government merger regulation of larger deals is the main exception to that speed and a disadvantage for corporate buyers.
2. Will a Healthy Deal “Pipeline” Produce More “Live” Deals?? Most readers are sharing the same experience as the major virtual data room providers – the pipeline of deals in “preparation” seems pretty full, but significantly fewer deals are going “live” and even those are expected to take much longer to close.? There’s lots “below the surface” but getting to LOIs and getting deals “across the finish line” appears challenging for the foreseeable future.And private credit and vendor financing are filling in some of the gap left by the traditional LBO lender retreat, giving PE funds alternative options to all-equity deals.?
3. Corporates and PE Fund Partnering.? PE funds will certainly look to augment deal flow with corporate carveouts.? These opportunities will involve not only PE acquisitions of corporate non-core assets, but PE’s acquisition of corporate target divisions that might present regulatory approval issues for corporate buyers.? Interestingly, corporates are looking to unload some ESG and sustainability-oriented investments as the value justification for these is re-evaluated. But dealmakers are also seeing corporates and PE funds join forces as buyers.? Corporate-PE “joint venturing” (Emerson and Black Rock recently did one) allow corporates and PE funds to share risk, manage check sizes and allow for more knowledge sharing and portfolio company autonomy.?
4. LP Distributions.? PE fund general partners are feeling heat from their limited partners who want portfolio company exits and liquidity.? The IPO market doesn’t show any signs of improvement in the near future.? PE exits are down more than 20% (that may be low) and LP distributions are down more than 50%.? The broader capital system is therefore “jamming up” as LPs lack the liquidity to redeploy into new investments.? PE funds have responded with more secondaries, capital raises from new investors and “continuation funds” that permit them to achieve their IRR and carry on their most promising portfolio companies by holding them longer.? A surprising 68% of institutional LPs indicate that they’ve been offered participation in a continuation fund.
5. Implications for Lower-Middle Market.? More and earlier deal preparation will now, more than ever, be a driver of deal value from the seller’s perspective.? Longer due diligence and sign-to-close periods will continue.? PE funds may be willing to do quality deals with all equity or in club deals with other PE funds.? While due diligence and closing periods will still be longer, all-equity deals provide more closing certainty than LBOs with financing risk.? Buyers and sellers who are willing to embrace change and complexity and pay for deal preparation will achieve more value.? And, of course, add-ons or “bolt-ons” should continue to be a way for PE funds to not only add technology, suppliers and customers, but also to lower their overall platform multiple profiles assuming smaller multiples for add-on deals. One continuing trend is in the resurgence of industrials, manufacturing and chemicals M&A.? Technology M&A has actually fallen, but manufacturing companies are using M&A to acquire technology assets and talent.? ESG and supply chain technology are converging with industrials and manufacturing.? Representations and warranties insurance has become a seller-favorable deal standard._____#Entrepreneurs?#Founders?#CEOs?#Investors?#Companies?#CM&AA #CEPA #M&A #ExperiencedAttorney ?#TrustedCounsel? #VentureCapital? #PrivateEquity ?#exitplanning? #CompanySale? #BusinessDeal? #Richmond? #DC?#Virginia