ArkMalibu M&A Market Monitor – September 2022

ArkMalibu Industry Snapshots, Third Quarter 2022 (Released 10/25/2022)

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 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 – Median multiple reverts to pre-pandemic levels and deal activity comes down

  • US & Canada M&A deal volume in the third quarter of 2022 has come back down to longer term averages
    • Q3 2022 saw 4,883 deals representing a 6% drop QoQ and an 18% drop YoY
  • Q3 saw the median Enterprise Value/EBITDA multiple fall 17% QoQ to 11.8x, coming back down from Q2’s remarkably high level and falling right in line with the average of the past four years
    • High quality companies continue to trade at premium multiples, while it is generally a more challenging environment for companies with average performance
  • Total reported transaction value in Q3 of $271bn fell 35% from last quarter and 55% from Q3 2021
    • The shadow of a looming recession has made buyers more hesitant to deploy capital than they have been in recent periods

Global M&A Overview

  • Globally, Q3 saw deal count fall 18% QoQ and 30% YoY while global capital invested through M&A fell 28% QoQ and 50% YoY
    • This falloff in M&A activity is steeper than that of the US and Canada, reflecting the relatively greater economic and geopolitical uncertainty faced around the globe
  • The median Enterprise Value/EBITDA multiple remained nearly level QoQ at 11.8x, which is in line with the domestic market

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

  • Strategics
    • Among strategic acquirers, the most common target industry was Commercial Services at 19% of deals followed by Software and Commercial Products both at 11%; the share of deals in Commercial Products and Commercial Services is consistent with this time last year, while Software deals are down 3 percentage points, reflecting in part the hesitancy to sell while multiples on software companies are lower relative to recent years
    • Some of the largest acquisitions by strategics this quarter were in the Financial and Software sectors
      • Financial: Allianz was acquired by Voya ($120.0bn), while PartnerRe was acquired by Covea ($9.3bn)
      • Software: Signify Health was acquired by CVS Health ($8.0bn), and Micro Focus was acquired by OpenText ($7.2bn)
  • Private Equity
    • Rising rates are beginning to take their toll on PE, but the weight of dry powder that needs to be deployed is propelling deal making
      • Pitchbook data estimates global PE dry powder at $3.2tn in Q3 2022, down 6% from last year but still higher than any year before 2018
      • Floating rates for loans on leveraged buyouts averaged 4.8% in February before doubling to 9.8% in September; this in combination with abundant dry powder is causing PE firms to incorporate higher equity levels vs. debt in their acquisitions
    • Total PE deals slowed 20.4% YoY from Q3 2021 and saw a particular slowdown in August and September; however, 2022 is still on pace to be the second most active year on record
  • Venture Capital
    • Deal activity in the US startup space is beginning to show more signs of distress, with the Q3 deal count of 4,074 representing a drop for the third straight quarter and the lowest mark since Q4 2020; this number is still strong on a historical basis however, being higher than any quarter prior to Q1 2021
    • VC total exit values were a tiny fraction of those in recent quarters, coming in at only $14bn compared to nearly $400bn in Q3 last year; Q4 2021 alone had a higher total exit value than 2022 YTD
      • Following the trend, VC exit deal counts were the lowest they have been in 8 quarters
    • Despite these headwinds, VC fundraising has built upon its torrid pace earlier this year, setting a new annual high through just 3 quarters; however, only $29bn of the $151bn raised this year came in during the third quarter, indicating decelerating momentum in response to the realities of the market

U.S. Equity Market Overview

  • US equities continue to decline as inflation and recession fears mount
    • Small-cap growth stocks proved more resilient than larger-cap value stocks in Q3 2022, with the Russell 2000 Growth Index outperforming the larger-cap Russell 1000 Value Index by 6.8%, reversing a 7-quarter trend
      • The index most associated with large-cap value, the DOW, performed even worse as it lost 6.5% over the quarter
      • This reversal is primarily due to the higher proportion of Telecom, Health Care, and Natural Resource stocks contained in small-cap indices, as these sectors outperformed the ones more commonly represented in large-cap indices
      • Growth indices outperformed their value counterparts primarily because of a sizable rebound in Consumer Discretionary and Energy growth stocks early in the quarter, which returned approximately 17% combined
    • Performance among sectors has varied widely, with Consumer Discretionary and Energy proving the most resilient
      • Consumer Discretionary and Energy are the only sectors in the S&P 500 to post quarterly gains, with 3.9% and 1.7% growth, respectively
      • The Communication Services sector was the weakest in Q3 2022, posting a 11.6% decline
    • The S&P 500 continued its steep decline in Q3 2022, posting its 3rd worst quarterly performance since 1950
    • Fear of continued rate hikes has been stoked by Chairman Powell’s reaffirmation of the Fed’s commitment to fight inflation and September’s jobs report showing a higher employment number
      • Revenue growth among S&P 500 companies is projected to drop precipitously in Q3 with the predicted 2.4% growth rate being the lowest reported by the index since Q3 2020
      • S&P 500 companies report that increasing labor costs are and will be the greatest hindrance on earnings as the labor shortage persists for many industries
    • Valuations for S&P 500 companies continue to taper slightly with the 12-month forward P/E ratio ending at 16.5x, a 6% decrease from Q2 2022 and 21% decrease from the start of the year

Economic Update

  • US inflation fell to 8.2% YoY in September, the 9th month in a row above 7.0%, while core CPI (excluding food and energy) came in higher at 6% YoY, marking a 40-year high
    • The core CPI number for September is an increase from August’s 6.3% YoY figure, representing a 0.6% increase MoM; the jump was led by increases in shelter and medical costs
    • EU inflation has ramped up quickly, with September’s 10.0% YoY growth rate driven by a full percentage point increase in Germany’s inflation MoM; the EU and much of the rest of the world has seen inflation increase dramatically due to energy and food price jumps tied to the war in Ukraine
  • While inflation is high, the US population has never had higher relative purchasing power as measured by Real Effective Exchange Rate, which takes countries’ relative price levels into account; this purchasing power measure is up 12% this year
    • The British pound is at a multi-decade low against the dollar, falling to an exchange rate of just 1.12 USD/GBP as of quarter end, marking a 17% drop YoY; the Euro has maintained its two-decade low, hovering at parity with the dollar over the quarter while the Japanese Yen is at its lowest since 1998
    • Against an overall basket of 6 major currencies, the dollar was up 16.7% YTD in 2022
  • The Federal Reserve bumped up interest rates a further 75 basis points at the September 21st meeting as part of its continued effort to bring inflation down to target levels
    • The median ‘dot plot’ Fed forecast for its 2023 rate plans is 4.6%, representing a further 150 basis point increase
    • Rate increases have taken their toll on the housing market, with existing home sales down 19.9% YoY as 30-year mortgage rates climbed to an average of 6.7% at quarter end from just 3.2% at the start of the year
    • Bonds continue to perform poorly with the S&P Aggregate Bond Index down 7% YTD in 2022; long-term debt has been hit the hardest due to its interest rate sensitivity, seeing losses in excess of 25% for many indices tracking government and corporate bonds with 20+ year average durations
  • The Federal Reserve expects real GDP growth to come in at only 0.2% for full-year 2022, and at a modest 1.2% growth for 2023
    • The US ISM PMI manufacturing index fell 1.9% in the September report to a 10-quarter low, indicating a slowdown in production led by a contraction in both new orders and in exports
    • The September jobs report declined slightly but remained strong, adding 263,000 jobs, while the unemployment rate fell to 3.5%, 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 below pre-pandemic levels
    • The yield curve has remained inverted (10 year less 2 year) since early July, which has historically preceded recessions in the United States
    • Globally, the affects of high inflation, tightening monetary policy and the war in Ukraine have led the IMF to lower its forecast for 2023 global growth to just 2.7%, the lowest in nearly two decades

Sources: ArkMalibu, Bank of International Settlements, Bureau of Economic Analysis, Bureau of Labor Statistics, Bloomberg, Federal Reserve, Fact Set data, IMF, J.P. Morgan, MarketWatch, Morningstar, Pitchbook, S&P Capital IQ, UN Economic Data, Wall Street Journal, and other publicly available news sources

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