M&A Quarterly Review—4th Quarter 2022
Middle market M&A activity decelerated in Q3 2022
- Deal volume declined 11% YoY to 13,619 during the TTM period ended September 2022
- Total deal value shrank by 14.6% to $349.5 billion during the same period
- Valuation multiples spiked to 8.1x TTM adjusted EBITDA in Q3 2022, a 20-year high
Macroeconomic headwinds slowed capital formation
- Leveraged loan issuance in the U.S. fell to $67.2 billion in Q3 2022, the lowest level since the fourth quarter of 2014
- The median cash ratio of investment grade companies declined to 18.8% in Q2 2022
- Dry powder held by global buyout firms shrank to $810 billion in November 2022
Economic indicators were mixed
- Real GDP expanded at an annual rate of 3.2% in Q3 2022, following two consecutive quarters of contraction
- The LEI for the U.S. decreased by 1.0% to 113.5 in November, continuing a nine month trend
- The Conference Board Consumer Confidence Index® improved in December to 108.3, after back-to-back declines
M&A activity is likely to stabilize and increase in 2023
- Valuations will likely pull back from all time highs, and volume will likely trend up toward pre-2021 levels
- Financial buyers will likely be more active as strategic buyers focus on the economy and geopolitical risks
- Digital transformation, supply chain stabilization, and synergies will likely motivate buyers
Risks to our view
- The economy falls into a deep, wide or U-shaped recession
- As the market adjusts to the rising cost of capital, the valuation expectations gap between buyers and sellers widens
- Volatile input availability and prices create material operational issues for target companies
