ArkMalibu M&A Market Monitor – January 2023

ArkMalibu Industry Snapshots, Fourth Quarter 2022 (Released 1/24/2023)

We invite you to read our M&A market analysis and access the Market Monitor links below, where you may download detailed reports containing M&A trends and data from 17 industries. Please feel free to contact us at (513) 583-5413 or info@arkmalibu.com to discuss how the information presented in each report may relate to your business and its own unique set of value drivers.

U.S. & Canada M&A Overview – Deal activity reverts to pre-pandemic levels in 2022

  • M&A deal volume in Q4 remained nearly flat with Q3, while 2022 overall represented a reversion to pre-pandemic levels of activity
    • Q4 2022 saw 4,548 deals, representing a 1% drop QoQ and a 27% drop YoY
    • 2022 registered 20,852 deals, representing a 12% drop from 2021 but remaining 4.6% above the average count of the 3 preceding years
  • Q4 saw the median Enterprise Value/EBITDA multiple remain virtually flat QoQ at 11.7x, while 2022’s median multiple remained elevated and matched 2021’s mark of 11.9x
  • Despite the economic headwinds, valuations in 2022 were propped up by the amount of investable capital in the M&A ecosystem as well as the preference for safer, quality assets which drove higher median deal valuations
  • Total reported transaction value in Q4 of $292bn increased 8% from Q3 but fell 44% from the same period in 2021
    • This Q4 QoQ increase, contrasted with the massive drop YoY, highlights the unique spike in capital spent on acquisitions at the end of 2021, and represents a return to normal M&A volumes

Global M&A Overview

  • Globally, Q4 saw deal count fall 10% QoQ and 27% YoY; capital invested through M&A rose 9.6% compared with Q3, while still falling 11% YoY
    • This falloff in M&A activity in Q4 is steeper than that of the U.S. and Canada, reflecting the greater economic pain felt in Europe and elsewhere toward the end of the year
  • The median Enterprise Value/EBITDA multiple declined QoQ by 15%, further highlighting the relative strength of the domestic market which did not see a decline in median multiple

U.S. & Canada M&A Overview of Selected Players

  • Strategics
    • 2022 saw total acquisitions made by strategics in the U.S. & Canada decrease 11% compared to 2021
      • The decline was led by a 30% decrease in Healthcare Services acquisitions and a 25% decline in Software deals
      • The overall dip was mitigated by higher deal counts in the Commercial Banking, Media, Hospitality, and Transportation industries, which collectively increased 38% from 2021
  • Private Equity
    • Total acquisitions by U.S. PE firms dropped slightly from the record year in 2021, falling 5%; total deal value declined 21%, weighed down by a higher cost of capital due to elevated interest rates
    • Sponsor-backed exit activity fell off in 2022 compared to 2021, dropping by 28% as PE firms found it more difficult to sell their portfolio companies for an acceptable return; total exit value was hit even harder, declining 66% YoY
    • Though still near record highs, dry powder for U.S. PE firms has fallen back to pre-pandemic levels, sitting at $788bn at the beginning of Q4, compared to reserves in excess of $837bn during the previous two years
    • LBO loans from banks took a significant dive from the highs of 2021, with 2H 2022 bank-led loans decreasing 80.2% YoY as the effect of rate hikes took hold; private debt picked up the slack by funding a larger-than-usual portion of LBOs, albeit at higher interest rates
  • Venture Capital
    • In 2022 the VC world saw investment volume come out strong from a historical perspective, while exits dried up in the turbulent economic environment
      • Early-stage investment deals fell each quarter over the course of the year, with 2022 as a whole down 15% and Q4 down 30% YoY
      • VC-backed exit deal count of ~1,200 in 2022 settled back in line with pre-pandemic levels; however, total exit value plummeted to less than 10% of last year, and at just $71bn this is the first year below $100bn since 2016
    • The $586bn of global VC dry powder at the beginning of Q4 2022 slightly surpassed the 2021 EOY level of $570bn, indicating persistent optimism for the asset category despite the lack of exits in 2022
      • The amount of capital raised by VC funds in 2022 surpassed 2021’s level
      • North America made up 70% of all VC capital raised globally in 2022, up from just 30% in 2018 when Asian markets raised the majority

U.S. Equity Market Overview

  • Publicly traded stocks saw moderate upward movement in Q4 in most indexes, including the S&P 500, which rose 7.1%; however, it registered a decline of 19.7% over the whole of 2022 as interest rate hikes and recession related fears dampened investor optimism
    • At the outset of 2022, the expectation for Fed rate hikes was 75 bps for the year; by the end of the year the sum of the rate hikes totaled 425bps
    • Despite the steep decline in 2022, the S&P remains 18.3% above its pre-pandemic level at the start of 2020, providing a 6% annual return and highlighting the correctional nature of the 2022 decline
  • Growth stocks performed worse in Q4 than value stocks as future earnings continued to be discounted more steeply with rising interest rates; the Russell 1000 Growth index’s 1.2% decline was 7.2% worse than its Russell 1000 Value counterpart
  • There were clear winners and losers by sector in 2022, with Energy gaining 59.1%, Communication Services down 40.4%, and Information Technology down 28.9%
    • The gains seen from the Energy sector were driven primarily by elevated oil and natural gas prices, which were heavily influenced by the effects of the war in Ukraine
    • The losses in many technology-oriented names were a result of lower risk tolerance from investors and a correction from exaggerated COVID-era expectations for tech stocks that proved unrealistic
  • Q4 earnings results for S&P 500 companies are expected to be 2.2% lower YoY due to input costs increases, while revenue is expected to grow by 4.2%, unadjusted for inflation
    • The average forward P/E ratio for the S&P 500 was 17.3x at the end of 2022, which is approximately in line with the 10-year average of 17.2x and below the 20x+ forward P/E levels seen throughout 2021

Economic Update

  • In the December report, U.S. CPI was 0.1% lower MoM for a 6.5% increase YoY, matching consensus expectations; core CPI (excluding food and energy) came in higher by 0.3% MoM, representing a 5.7% rise YoY
    • The CPI MoM decrease in December was led by energy costs falling 4.5%; this MoM decrease in CPI was the first decrease since May of 2020
    • The rate of inflation has fallen both in the U.S. and abroad: the Eurozone, the UK, and various key Asian nations such as India and South Korea all saw moderating YoY rates in Q4
  • The Federal Reserve hiked interest rates 50 basis points at the December 14th meeting as part of its continued effort to bring inflation down to target levels
    • The median ‘dot plot’ Fed forecast for its 2023 rate plan is 5.0-5.25%, representing a 75 basis point increase from the current Fed Funds rate
    • Rate increases continue to weigh down the housing market, with existing home sales finishing 2022 down 35% YoY as 30-year mortgage rates climbed to an average of 6.5% at year end from just 3.2% at the start of the year; median home prices remained flat since Q1 2022
    • Bonds performed poorly over the course of the year, with the S&P Aggregate Bond Index down 9.4% in 2022; however, the index performed positively over the Q4 period, rising 2.1% as future interest rate expectations leveled out
  • The Federal Reserve expects real GDP growth to come in at only 0.5% for full-year 2023, matching that of 2022 and lowering their previously released expectation of 1.2% for the coming year
    • The U.S. ISM PMI manufacturing index fell 0.6% in the December report to an 11-quarter low, indicating a further broad slowdown in production buoyed only by increased manufacturing employment levels
    • The December jobs report remained moderately strong, adding 223,000 jobs, while the unemployment rate inched back down to 3.5%, matching September for a five-decade low; however, measures reflecting the total number of people in the workforce such as the employment population ratio and the labor force participation rate are still 1.0% below pre-pandemic levels
    • Globally, the effects of high inflation, tightening monetary policy and geopolitical uncertainty have led the World Bank to lower its forecast for 2023 global growth to just 1.7%, down from the 3% mark projected earlier in 2022
  • Many economists and business leaders foresee a U.S. recession in 2023, though the expected magnitude of the downturn has diminished slightly in recent months
    • A monthly survey of economists conducted by Bloomberg regarding the chance of recession in 2023 yielded an average probability of 70% in December, up from 50% in the September survey
    • The yield curve has remained inverted (10 year less 2 year) since early July, which has historically preceded recessions in the United States; the negative delta has increased from 40bps to 50bps since Q3
    • The US’s historically low unemployment rate combined with signs of inflation beginning to cool has led many to expect a mild recession late in 2023 driven primarily by the latent effects of steep rate hikes in 2022

Sources: ArkMalibu, Bureau of Economic Analysis, Bureau of Labor Statistics, Bloomberg, Federal Reserve, Fact Set data, Fortune, J.P. Morgan, MarketWatch, Morningstar, Pitchbook, Refinitiv, Reuters, S&P Capital IQ, The Wall Street Journal, World Bank and other publicly available news sources

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