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