While many anticipated a slowdown in 2023 with talks of a recession, we haven’t seen that in our central and southern region so far. At ClearRidge, with private company transactions $20 Million to $100 Million in revenue, we have had one of the busiest starts to any year since our founding fifteen years ago. As we continue through 2023, we’re anticipating a further pickup in deal activity as there continue to be unprecedented levels of cash available for acquisitions, both from strategic and private acquirers. Even in the event of a mild recession, company balance sheets are stronger now than when the US economy entered previous recessionary periods. With higher interest rates, companies have been committing more equity to transactions or coming up with creative structures to keep the cost of borrowing and debt service at a reasonable level for the acquirer.
Tailwinds for M&A continue to be the amount of cash available for acquisitions. With many corporations flush with cash coming off the pandemic, thanks to unprecedented government stimulus, strategic buyers still have reserves available to partially offset higher debt financing costs. Private equity groups currently own around 11,000 US companies and are sitting on enormous cash balances. They have to continue investing in companies or ultimately return funds to their limited partners, so they are actively looking.
Public versus Private M&A
In terms of transaction activity and equity valuations, public stock markets are the first to react to changing economic conditions, pro-actively pricing in future expectations, followed by large company transformational transactions and then smaller private company transactions lagging the market as they are typically valued on recent historical financial performance. Not only have we continued to see high volumes, but the value of our recent transactions continue to trade at premiums, and we see that continuing further into 2023.
If you’re the owner of a private company with $20 Million to $100 Million in annual revenue, the good news is that valuations have remained robust so long as your business has continued to perform and has a strong backlog.
Inflation and Interest Rates
Inflation is easing. Per the International Monetary Fund (IMF) forecast, US annual inflation in 2023 is expected to decrease to 3.5%, about 1% higher than pre-pandemic years and down from a 40-year high of 9.1% in June 2022. The IMF expects annual inflation in the US to settle back at pre-pandemic levels by 2024. When the Fed gets inflation under control, we may see a rate easing environment.
In the section below, we consider the M&A outlook for several key industries in our region.
Aerospace and Defense
Aerospace and Defense experienced a muted second half of 2022 in terms of deal making.
In 2023 aerospace M&A, maintenance, repair and operations (MRO) transactions are expected to lead the way. Other drivers for 2023 include portfolio optimization and subsectors such as space, cyber, unmanned and hypersonics.
Defense deals are anticipated to be small to medium sized transactions due to the Department of Defense’s unfavorable view of further consolidation among larger industry participants. There is high demand for manufacturers that supply the US Defense departments.
Mitch McConnell called on Congress on Tuesday to increase defense spending in the coming year to confront what he termed growing threats from Russia and China. This is in defiance of proposals to keep defense spending at current levels. With the war in Ukraine and rising tensions with Russia and China, US defense is expected by many to increase in the coming year.
Many defense companies currently have a strong cash position and they may leverage solid balance sheets for smaller defense and government services transactions to optimize portfolios and maximize growth.
Chemicals
Chemicals M&A volumes were down in 2022 due to fears of rising interest rates, recession, and the Russia-Ukraine war. However, strong balance sheets have companies well positioned as these uncertainties diminish. The cost of capital is slowing some transactions.
Geopolitical unrest has chemical companies thinking of reshoring operations to the US or moving to more secure locations to mitigate supply chain disruption. This is resulting in increased investment and attention on the US market for company supply chains.
Delayed divestitures from 2022 are likely to come back online in 2023 as companies manage their portfolios to create growth, value, and offload non-core business that is no longer complementing their core business.
Healthcare
Health services deal volume continued to increase in 2022 but softened in the last quarter of the year. Deal value has decreased from the highs of 2021 as the industry experienced smaller add on transactions.
Interest continues in the Home Health and Hospice subsector, an ongoing theme since alternative healthcare opportunities became popular during the pandemic.
Value-based care provider models, replacing old fee-for-service models could be targets for 2023 deal activity, along with the technology that accommodates these new models.
Cyber security and labor market challenges are two enhanced areas of focus during potential deal evaluations as buyers seek to mitigate risk from cybercrime and labor supply/demand issues.
Industrial Manufacturing
Industrial Manufacturing deal activity was above historical trends in 2022, even though numbers came in lower than the historic highs of 2021. Headwinds of inflation, raw material costs and availability, freight prices, and cost of capital will be continued challenges for manufacturing M&A this year.
Strategic expansion from mid-market corporations, portfolio company divestment as well as divestitures of non-core assets will create solid deal activity in 2023.
Mitigating supply chain risk will be a continued theme this year as companies look for acquisition opportunities in nearshoring facilities or suppliers.
The resilience of the industrial manufacturing sector has been a surprise for many and we see 2023 as another strong year.
Engineering and Construction
Engineering and Construction deal activity was muted in 2022 due to geopolitical tensions and economic uncertainty. However, M&A could pick up in the second half of 2023 with high levels of available capital for acquisitions, further fueled by strong federal spending with the Infrastructure Investment Act, and tax incentives with the Inflation Reduction Act.
Higher borrowing rates and increasing home prices caused housing starts to drop. The slowdown in the residential construction market also affected the price of lumber as it continues to drop since its high in March of 2022.
With tax incentives for decarbonization in the Inflation Reduction Act and the increasing customer and stakeholder emphasis on ESG (environmental, social, and governance), companies that offer lower carbon technologies or responsible sourcing are in greater demand for strategic acquisitions and will gain higher valuation multiples.
Companies can also preserve value and profitability by utilizing innovative technologies and solutions for supply chain management. Wage inflation and labor shortages, as well as sourcing and supply chain disruption, have increased input costs and reduced margins. Overall, engineering and construction M&A remained stronger than many of us anticipated.
Transportation and Logistics
Coming off the pandemic years and an e-commerce boom, freight prices, supply chains, and inventory volumes have stabilized. Deal volume is down 24% from 2021 and deal value down 16%.
M&A will still be a focus to acquire technology advancements and also mitigate the risks of future labor shortages. Companies that lost out due to capacity during the pandemic will be looking to mitigate their risk in the future.
Automation technology which gives greater visibility to the supply chain can improve customer service and contribute to timely and effective decision making. Innovation helps companies adapt to be more attractive targets or find synergy opportunities to merge with other companies that seek gains from improved technology utilization.
Energy
Energy deal activity was steady in 2022 and is expected to gain strength in 2023 with robust energy prices and increasing confidence in the sector.
Measures taken in the Inflation Reduction Ace to reduce carbon emissions have shifted incentives away from upstream exploration and production, however exploration and production remain a necessity. While many acquirers are exclusively targeting renewable or cleantech assets, we’re now seeing some companies preparing IPOs in the traditional energy sector amid increased investor attention.
Continuing higher and more stable commodity prices could also lead to higher deal activity as some traditional energy companies are looking to diversify portfolios and invest in new directions, including carbon capture technologies, biofuels, hydrogen, and liquified natural gas (LNG).
As Europe seeks alternative energy supply away from Russia, many European companies are looking at US LNG facilities as a source for natural gas supply. This, in addition to reducing carbon emissions, will likely lead to deal activity in the natural gas space.
Sources: This report has been compiled from reports and research including federal data, independent analysis, Bain & Company, EY, Federal Reserve, Reuters, Janes Capital, US Chamber of Commerce, Oilprice.com, Kaufman Hall, DC Advisory, Kiplinger, PCE-Companies, Mergermarket, PricewaterhouseCoopers, and SDR.
About ClearRidge
ClearRidge was co-founded in 2008 by Bruce Jones and Matthew Bristow to provide business owners in the central U.S. with industry-leading advice and representation. Our business is built upon our reputation, track record and the skills and efforts put forth by our team. As the most experienced and innovative investment banking firm in our region, ClearRidge has advised on mergers and acquisitions in excess of $1 Billion in transaction value. You can visit our offices in Tulsa, OK and Oklahoma City, OK and find additional information at www.clearridgecapital.com.
How Can ClearRidge Help You Sell Your Business?
In order to capitalize on current valuations and close a business sale in 2023, work needs to start today, with diligent planning and preparation to maximize the sale price of your company. Our team at ClearRidge stands ready to clear all pre-emptive due diligence, research, identify and screen prospective buyers, create all confidential marketing materials, data analysis and memoranda, confidentially market the business, lead negotiations on price and terms, and manage the opposing counterparty’s diligence teams.
Clients trust ClearRidge to deliver a confidential and discrete preparation and sale process. We remove obstacles to close a transaction and ensure only the most qualified buyers with the capital commitment make it to the closing table.
ClearRidge is the leading M&A advisory firm in our region, closing more transactions than any other firm and recognized for the quality of our work and success at managing and arranging transactions for our clients’ companies. For further information on our team, industry expertise and transactions history, please visit www.ClearRidgeCapital.com.
