2023 MIDYEAR M&A REPORT
Proprietary and Strictly Confidential
2023 Midyear M&A Report
It takes two to make a market
1
Overall global M&A volume is down 29% in the fist six months of 2023; Middle market continues to remain resilient in a challenging market
2
Macroeconomic and interest rate uncertainty continues to complicate dealmaking and foster caution among sellers and buyers alike
3
Valuations for strategic technology deals declined dramatically, but valuations have held steady or ticked up in most other sectors
4
Dealmaking is likely to resume faster than anticipated and favor the best-prepared buyers and sellers
Source: Pitchbook | Data as of June 30, 2023
1
Global M&A market is down 29% year over year
GLOBAL M&A DEAL MARKET
$ IN TRILLIONS
$2.5
$3.9
$4.7
$4.0
$3.8
1H
2H
$4.4
$4.0
$3.5
$5.6
$4.5
$1.8
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Strategic M&A remains stalled as corporate clarity is contemplated
Continued disconnect between buyers and sellers on valuation
Financing markets continue to be challenging
Deal count remains relatively unchanged Y/Y due to smaller deal values
1
Add-on deals account for 8 of every 10 buyouts…
Private equity can still find “decent” tack-on purchases for exiting portfolio companies
COMMENTARY
•Private equity has an imperative to deploy unprecedent levels of dry powder ($1.35Tn in the U.S.)
•Given scarcity of attractive financing terms, private equity can leverage portfolio companies’ equity for smaller add-on deals
•With the continued impact from the twin aftershocks of the pandemic and inflation spike, add-ons allow investors to stick to their existing investment
theses rather than bet on new platforms
GLOBAL PRIVATE EQUITY ADD-ON COUNT
5,000
4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500
0
Add-On
Non Add-On
Add-On %
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2015 2016 2017 2018 2019 2020 2021 2022 2023*
80%
70%
60% 50% 40% 30% 20% 10% 0%
Source: Pitchbook, Dealogic | As of June 30, 2023
1
… Providing shoots of optimism in middle market dealmaking
Middle market M&A continues to be resilient as acquirors turn to smaller, tuck in acquisitions to offset higher interest rates and lower leverage levels
GLOBAL M&A DEAL MARKET
$ IN TRILLIONS
$2.5
$3.9
$4.7
$4.0
$3.8
$4.4
$4.0
$3.5
$5.6
$4.5
$2.5
$1.8
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
YTD '22
YTD '23
Total
Mega (Over $5bn) Mid-Cap
$1bn – $5bn $500mm – $1bn
Middle market
$250mm – $500mm $100mm – $250mm Under $100mm
YTD change 2022-23
-29%
-50%
-27%
-34% -23%
-16%
-8% -17% -24%
2
Recession? Some signs say not so fast
The labor market is humming, consumers are still spending, and manufacturing may be finding its footing
LABOR FORCE ENGAGEMENT IS AT POST-GFC HIGHS
DESPITE HIGHER RATES, FINANCIAL OBLIGATIONS REMAIN LOW
U.S. CIVILIAN PARTICIPATION RATE, 25-54 YEARS, %
HOUSEHOLD FINANCIAL OBLIGATIONS TO DISPOSABLE INCOME, %
87% 86% 85% 84% 83% 82% 81% 80% 79% 78% 77%
'80
'85
'90
'95
'00
'05
'10
'15
'20
20% 19% 18% 17% 16% 15%
14%
13% 12%
'80
'85
'90
'95
'00
'05
'10
'15
'20
STRIKING SURGE IN MANUFACTURING CONSTRUCTION SPENDING
TOTAL U.S. MANUFACTURING CONSTRUCTION SPENDING, $ IN MM
$250,000
$200,000
$150,000
$100,000
$50,000
$0
'02
'05
Source: BLS, FRED
'09
'13
'16
'20
INFLATION IS COOLING UNDER THE SURFACE
SHARE OF CPI ITEMS WITHIN YOY GROWTH RANGES, %
100% 90% 80% 70% 60% 50% 40% 30%
20%
10%
0%
'19
'20
'21
'22
'23
2
Recession? Some signs say not so fast (cont’d)
Investors believe the worst of earnings recessions are behind us
% OF S&P 500 SECTORS (BY MARKET CAP) WITH NEGATIVE Y/Y EARNINGS GROWTH
0%
-10%
-20%
-30%
-40%
-50%
-60%
-70%
-80%
2021 Q4
2022 Q1
2022 Q2
2022 Q3
2022 Q4
2023 Q1
Consensus Expectations
2023 Q2
2023 Q3
2023 Q4
2024 Q1
Utilities
Materials
Industrials
Real Estates
Energy
Consumer Staples
Health Care
Financials
Consumer Discretionary
Information Technology
Communication Services
Bloomberg Finance L.P. Data as of July 5, 2023.
2
So, what’s the problem?
The stronger the economy stays, the more the Fed will have to hike rates
“Fed Pushes Rates Higher Following June Pause, Leaves Door Open to Further Increases”
• • •
•
•
On July 26, the Fed increased the fed funds policy rate to the highest nominal rate since 2001 (5.25%-5.50%)
Inflation has now come down from a seasonally adjusted peak of 8.9% in June 2022 to just 3.1% in June 2023
Meanwhile, nearly all leading economic indicators of both growth and inflation are pointing to a further deceleration in the coming
months and quarters
Investors are clearly starting to become more exuberant about the prospect for an “immaculate disinflation,” or a soft landing, which is
giving them the confidence to step back into the market and increasing the fear of missing out
The Fed is concerned that market participants may already be starting to unwind its policy tightening before such behavior might be
warranted
FED FUNDS RATE, FUTURE MARKET EXPECTATIONS, %
6.0% 5.0% 4.0% 3.0% 2.0% 1.0%
Effective Fed Funds Rate
Current Futures Market Expectations
0.0%
Dec. 19
Feb. 20
Apr. 20
Jun. 20
Aug. 20
Oct. 20
Dec. 20
Feb. 21
Apr. 21
Jun. 21
Aug. 21
Oct. 21
Dec. 21
Feb. 22
Apr. 22
Jun. 22
Aug. 22
Oct. 22
Dec. 22
Feb. 23
Apr. 23
Jun. 23
Aug. 23
Oct. 23
Dec. 23
Feb. 24
Apr. 24
Jun. 24
Aug. 24
Oct. 24
Dec. 24
Feb. 25
Apr. 25
Jun. 25
Aug. 25
Oct. 25
Dec. 25
Feb. 26
Source: Bloomberg, Federal Reserve Bank of Atlanta, Equity Research
2
The lending market continues to be sluggish as banks prepare for the worst
SURGING INTEREST RATES FUNCTION AS A GOVERNOR ON THE AVAILABILITY OF DEBT IN LEVERAGED BUYOUTS…
QUARTERLY REPORTED U.S. FINANCINGS FOR LEVERAGED BUYOUTS, #
46
23
'19
57
22
12 12
18
10
38
33
'20
Traditional bank syndicated
48
36
66
47
82
47
Private credit 9899
26
29
'21
58
18
61
8
58
1 '22
5
69
7
39
…AND IMPACT SPONSOR’S ABILITY TO RECEIVE ATTRACTIVE FINANCING TO SUPPORT HIGHER VALUATION
TOTAL NORTH AMERICA & EUROPE MULTIPLES FOR FINANCIAL SPONSOR M&A
14.0x 12.0x 10.0x
8.0x
6.0x 4.0x 2.0x 0.0x
10.3x
2013
10.0x
2014
10.5x
2015
9.9x
Debt/EBITDA
11.7x
2016
2017
Equity/EBITDA
11.5x 12.0x
2018
2019
Debt % 12.4x
2020
11.6x
2021
11.6x
2022
10.5x
YTD '23
100%
80% 60% 40% 20% 0%
Source: Pitchbook, LCD data | As of June 30, 2023
3
Valuations for strategic technology deals declined dramatically, but valuations have held steady or ticked up in most other sectors
THE VALUATION GAP HAS CONTINUED TO EXPAND GFC…
PUBLIC COMPANY TRADING MULTIPLES VERSUS M&A MULTIPLES
20.0x
15.0x 10.0x 5.0x 0.0x
2012
2013
2014
2015
M&A EV/EBITDA
2016
2017
S&P 500 EV/EBITDA
2018
2019
2020
2021
14.1x
9.1x
2022
16.6x
8.8x
2023
…. BUT DEAL MULTIPLES HAVE REACTED UNEVENLY, AND IN MANY SECTORS HAVE HELD UP PERCENTAGE CHANGE IN MEDIAN EV/EBITDA FOR STRATEGIC DEALS, BY INDUSTRY
-10%
-3%
Advanced manufacturing & services
Consumer products
4%
Energy & natural resources
12%
Financial services
-1%
Healthcare & life sciences
2%
Media
3%
Retail
-43% Technology
-3%
Telecom
-14%
Total
Source: Pitchbook, Dealogic | Data as of June 30, 2023
3
Effective dealmaking in uncertain times
Buyers are leveraging structure to bridge the valuation gap
Earnout
Allows the seller to recognize higher valuation based on future performance, and the buyer benefits from the ability to shift risk to the seller
Structured Equity
Provides buyers upside based on their initial investment to ensure they are able to meet threshold returns despite higher valuation
EARNOUT INCLUDED
30% 25% 20% 15% 10% 5% 0%
23%
2017
13%
2018
15%
2019
19%
2020
17%
2021
21%
2022
Source: SRS Aquiom 2023 M&A Deal Terms Study
Equity Rollover
Trending towards the material end of the historical spectrum (10-40% of enterprise value) for first time institutional capital
Seller Note
Seller notes give buyers confidence that the sellers will remain motivated post-
transaction; also reduces lender risk & serves as bridge financing in uncertain markets
EARNOUT METRICS
Revenue
Earnings/EBITDA
Other
2022
2021
2020
23%
16%
24%
22%
38%
39%
61%
65%
59%
4
DCA’s 2023 Outlook
Dealmaking to resume faster than anticipated
Uncertainty
Twin aftershocks of the pandemic and inflation spike have made it
difficult for buyers to assess true business performance and underlying value. We expect recovery will become more apparent, but not in all industries all at once
Competition
Interest rate and financing market uncertainty to subside; investors are clearly starting to become more exuberant about the prospect for an “immaculate disinflation,” or a soft landing, which is giving them the
confidence to step back into the market and increasing the fear of missing out if they do not
Size & Scope
Under the radar deals continue to happen, particularly for new intellectual property, new capabilities, and new markets. Smaller deals have been far more resilient than big-dollar M&A in the current environment and will continue to accelerate
Crystalize
Private equity exits are bound to pick up as portfolios age. That process can be delayed, but cannot be postponed forever
4
Aligning expectations
How to be prepared when the time is right
Buyers are paying more attention to:
• • • • • •
New strategic growth and value creation levers Business model transformation opportunities Technological capabilities (i.e., cloud, cyber, AI) Deeper data analysis
Operating model robustness and durability Acquiring and retaining talent
Savvy sellers need to prepare:
• • • • • • • • • •
Compelling equity stories with quality supporting data Transformation story with targets and KPIs
Detailed M&A roadmap
New growth levers
Cost reduction opportunities
Technology roadmap
Scenario analysis of upsides and risks
Operations strategy and leverage
Workforce strategy and metrics
Financial and operating data to meet sustainability reporting requirements
4
DCA Partners
Delivering independent advisory and flawless execution for family-owned businesses
ABOUT DCA PARTNERS
REPRESENTATIVE TRANSACTIONS FOR FAMILY-OWNED BUSINESSES1
DCA Partners is a diversified financial services firm encompassing Mergers & Acquisitions advisory, Private Equity, and institutional-quality real estate investments through our affiliated Family Office. We leverage our industry and transaction experience to forge enduring relationships with our clients, while creating
competitive processes and value-added organization change that deliver outstanding results
2023 Undisclosed
Financial advisor to
On its significant investment from
2022 Undisclosed
Financial advisor to
On its strategic investment from
2021 $773mm
Financial advisor to
On its acquisition by
FULL-SERVICE M&A CAPABILITIES
SELL-SIDE
EXIT FOR PREMIUM VALUE
BUY-SIDE
GROWTH THROUGH ACQUISITION
STRATEGIC ADVISORY
PRE-EXIT PLANNING
2021 Undisclosed
Financial advisor to
On its acquisition by
2021 Undisclosed
Financial advisor to
On its acquisitions of
2020 $681mm
Financial advisor to
On its acquisition by
Note: 1 Includes transactions completed at prior firms
3721 Douglas Blvd., Suite 350 • Roseville, CA 95661 (916) 960-5350
www.dcapartners.com