M&A Activity Diverges from Larger to Smaller Transactions in Q3 2022. What’s next for M&A in 2023?

M&A Activity Diverges from Larger to Smaller Transactions in Q3 2022

Global M&A activity plummeted in the third quarter of 2022, but that was attributable to a decline in large transformational industry transactions.  Volatile equity markets (that comprise many public company strategic acquirers), rising interest rates and economic uncertainty have weighed on M&A activity.

However, for ClearRidge and our private company transactions ($20 Million – $100 Million in revenues), transaction volume has been robust in 2022, with a strong year so far and two more client transactions scheduled to close in the final six weeks of 2022, with another scheduled to close in January 2023.

Public versus Private M&A

In terms of transaction activity and equity valuations, public equity 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. Our recent transactions continue to trade at valuation premiums, and we see that continuing into the first half of 2023. If we do enter a recession in the New Year, smaller private company transactions will be the last to be impacted.

If you’re the owner of a private company with $20 Million to $100 Million in revenues in a sector that could be impacted by a recession, you likely have a 6-month window to close a transaction and secure a premium valuation before your business valuation is impacted by an economic slowdown.

Federal Reserve and Inflation

The Federal Reserve raised the federal funds rate 0.75 points on November 2nd, the fourth straight 75-basis-point rate hike that brought the policy rate to a 3.75%-4% range as of last week. The Fed has been pursuing the most aggressive withdrawal of stimulus since the 1980s and a larger than expected drop in consumer inflation may prompt the Federal Reserve to pare down future interest rate increases as the impact of its swift monetary tightening begins to take hold.  October data published last Thursday by the Labor Department showed key items like rents increasing less than expected, while the price index for used cars – a factor in the initial, pandemic-related surge in inflation – declined by 2.4%, the fourth consecutive monthly drop. Prices for airfares, medical services, and apparel all declined.  Though overall inflation remained high by historic standards, with prices increasing 7.7% from a year earlier, the monthly pace of core inflation that excludes volatile food and energy costs dropped by half.

Debt Financing Costs

2021 was a record-setting year in M&A, so even a moderate 2022 would show a decline year-over-year. 2023 transaction activity is likely to be muted as central banks have been raising interest rates to combat inflation. That hurts M&A as it increases the cost of capital to finance a transaction. Higher rates lead to higher debt service, which in turn impacts cash flow unless buyers contribute additional equity in the transaction. Unless an acquirer can draw on cash to fund a transaction, they’re going to need to access the debt markets and could be paying twice the debt service compared to 2021. Public companies are less willing to issue new shares at depressed equity prices to raise cash for an acquisition.  With recessionary fears growing, the outlook for the operating environment is less favorable. Executive confidence is a key factor in dealmaking and executives are less confident when the economic outlook is uncertain.

Tailwinds for M&A

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 debt financing costs. Private equity groups are sitting on enormous cash balances and they have to invest in companies or ultimately return funds to their limited partners.  Furthermore, with some companies in distress next year, there will be opportunistic acquisition opportunities, in addition to non-core divestitures of companies looking to return to their core focus and shore up their balance sheets.

What else is on the horizon for M&A?

Business owners may be contemplating selling in any given year but are often motivated by a trigger event to take action and sell, responding to a prospective buyer or engaging an M&A advisory firm to guide them through the process.  Many business owners are feeling that the first quarter of 2023 may be a good time to sell, capturing the value of strong rebounding performance in the past couple of years, before the effects of a potential recession impact valuations.  The pipeline continues to be strong for new businesses coming to market.

In the section below, we consider the M&A outlook for several key industries in our region.

Aerospace and Defense

Airline financial performance is expected to improve in all regions in 2022, with North America the only region expected to return to profitability this year. Cost pressures will be a focus for airlines this year as oil and fuel prices have risen sharply. In some markets, labor shortages have created near-term challenges for costs and operations.  Airlines globally are expected to return to profitability in 2023.

Supply chain disruption put both Boeing and Airbus behind in jet deliveries.  This will be one more disruptor for their customer airlines, also dealing with a rebound in consumer flight demand, a pilot shortage, and lack of spare parts for existing planes.

With these challenges in commercial aviation, major players have been shifting focus to military business.  However, larger deals in the defense sector will be limited by US regulators’ concerns over consolidation and potential monopolies.  The Russian invasion of Ukraine altered the US’ national security position from the threat of non-state terrorist organizations to nation states at war. With this backdrop, Congress passed an increase in defense spending of nearly 6%, a total expected to keep rising. We are seeing defense-related companies anticipating a strong 2023.

Aerospace deal activity remained subdued in Q3, but certain sectors (cyber, AI, and unmanned technologies) remain strong.


Deal values have remained high in chemicals for 2022 due to the Celanese – DuPont’s Mobility and Materials unit megadeal announced earlier in the year.  However, the number of chemical deals are down in the first three quarters of the year.

As chemical companies seek to mitigate risks to supply chains, protect margins, and realign portfolios, they will again consider M&A activity.  Even with economic and other headwinds, fundamentals remain strong in chemicals with high levels of capital for deployment, strong balance sheets in the industry, and the need for continuing business transformation. Analysts are optimistic for chemical deal activity in the final quarter of the year.


The outlook into 2023 looks strong for oil and gas companies as their conservative approach to investing in this cycle is showing more sustainable growth trends. That notwithstanding, acquirers have been increasingly focused on their core strategy and are uncharacteristically disciplined in how they deploy capital.  Even with high energy prices and a boom in profitability, institutional capital remains shy about reentering the oil and gas markets, with many companies pivoting to an ESG focus (Environmental, Social, and Governance) in response to investors’ preference for sustainable, socially responsible and mission-related investing, although analysts are now asking questions as to how effective ESG has been in changing the industry.

Persistent high commodity prices have executives rethinking investment in traditional oil production and private companies have been taking advantage of higher prices and looking at acquisitions with their available free cash and solid balance sheets. Valuations have been conservative due to lack of visibility of acquirers’ future valuations and potential divestiture of the acquired business.

Midstream faces the rising cost of capital for new pipeline construction.  As a result, some larger companies have been looking to expand their networks by acquiring smaller players rather than constructing new pipelines.

The industry continues to deal with labor shortages, supply chain disruption, and inflation.

Engineering and Construction

As the market responds to inflationary pressure and a higher cost of capital, companies will need a highly focused approach to M&A activity.

The construction industry added jobs in August, with more than half supporting residential construction. Residential construction, however, is down 13% from April 2022, which was then the highest in a decade.  The Dodge Momentum Index for non-residential construction hit a 14-year high in July, with a slight dip in August.  We anticipate declines through the remainder of the year.

Feeling a release from the pressure created during the building boom the last couple years, the price of lumber has now lowered to pre-pandemic levels.

Housing has shown weakness in some previous hot-spots, but certain areas of the country still have housing shortages, limited inventory and demand remains strong.


Healthcare deal activity was suppressed in Q3, but up slightly compared to the same quarter in 2021.

One megadeal was announced in Q3 as CVS focuses on home health and seeks to acquire Signify’s healthcare platform.  This is one more step in CVS’ push to become a vertically integrated health care provider.

Like many industries, healthcare faces issues with supply chain shortages and labor concerns.  Deals offering innovative technology or alternative care options can increase efficiencies and counter staff shortages.

Industrial Manufacturing

Industrial Manufacturing M&A has been hindered in some sectors due to inflation, freight costs, and raw material price volatility.  However, many corporations are sitting on high cash reserves, targeting acquisitions and carve-out divestitures, all of which are potential for increased deal activity.  Focus on supply chain will continue to be top of mind, but there are signs that supply constraints are easing.

Many business owners who successfully navigated COVID are considering a sale of their business now while valuations remain high.  Strong recent financial performance and potential downside risks are triggering sellers to plan for a sale.  With uncertainty about the economic outlook in 2023 and a continuing inflationary environment, the first quarter of 2023 represents a good time to lock in a good deal valuation. Industrial manufacturing acquirers are remaining focused on fit and alignment to their existing business model and strategic goals.

Transportation and Logistics

Deal value had been up over the last twelve months in transportation and logistics, with increases in trucking, passenger air and shipping.  Logistics was the leading subsector in deal volume. We don’t yet have data for Q3.

Labor talks continue for the West coast ports with negotiations likely to continue into 2023.  A provisional agreement was reached between railroads and unions to avoid what would have been the largest nationwide rail strike in 20 years.

Technology and digitization continue to be a focus in this sector to increase efficiencies, mitigate delays and allow for improved fleet management, quicker and pro-active decision making.

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.

Disclaimer: Securities related services (capital sourcing and securities transactions) are offered through an unaffiliated entity, M&A Securities Group, Inc., member FINRA/SiPC. Managing Directors of ClearRidge are registered investment banking agents with M&A Securities.