M&A Trends 2023: Deal Momentum Continues To Build Despite Banking Crisis Fears

The Denver ACG hosted the Rocky Mountain Corporate Growth Conference on March 20 and 21. Woodbridge International Partner Jacob Koenig participated in the “Corporate M&A Summit” panel discussion along with Sam Pope from Tendit Group and Adam Boscoe of Granicus, with Aaron Martinez of Moss Adams moderating. Key discussion points included:

+ Operating in a dynamic market environment requires an increased level of awareness—no sudden pullback in dealmaking activity is imminent at this point.

+ The impact of the rising rate environment has been a trend towards greater structure, but bank liquidity concerns have less of an impact on lower middle market M&A than some might assume.

+ Better prepared and represented sellers have better outcomes in the sale process.

MARCH 2023: At the Rocky Mountain Corporate Growth Conference, an environment of enterprising enthusiasm stood in stark contrast to gloomy headlines of an ongoing “banking crisis”. Aaron Martinez of Moss Adams, who moderated the event’s Corporate M&A Summit panel, reiterated Jacob Koenig of Woodbridge International’s comment that conversations at the two-day event seemed conspicuously absent of fear of contagion from the weekend’s Swiss banking row. Fellow panelists Adam Boscoe of Granicus and Tendit Group’s Sam Pope echoed the overarching view that 2023 continues to build momentum in the wake of the brief slowdown experienced by the industry between the end of 2022 and January 2023.

The panelists agreed that operating in a dynamic market requires an increased level of awareness, but that the performance of target companies should take precedence over broader macroeconomic anxieties. A subsequent question from the moderator as to whether a higher risk environment could extend diligence processes was met with resistance by Pope, who noted that although delays in securing bank financing could prolong diligence, Tendit Group remained confident in its methodology. As a rule, good buyers should always aim to close transactions as in as timely a manner as possible.

The impact of the rising rate environment has been a trend towards greater structure – in particular, the use of seller’s notes has increased and aversion to debt has grown. As a result, the panel felt that even if the appetite for bank loans is impacted by the latest headlines, the effect on deal flow is likely to be less significant than might be expected. In contrast with the liquidity crunch in banking, private equity firms remain flush with cash and eager to deploy it in acquiring high-quality assets. Both Boscoe and Pope noted that the dry powder raised over the past couple of years is yet to be deployed, regardless of the current trend towards greater caution. The panelists posited that this would result in a push for more structure or co-investing, rather than a wholesale pullback from dealmaking.

Granicus, which operates primarily in the tech space, has been close to the latest bout of market turmoil. Nonetheless, Boscoe noted that the outlook for the second half of 2023 remains robust, citing a continued appetite for deal activity as multiples in tech fell from their recent peak. Koenig commented that average multiples across Woodbridge International’s deals have remained consistent over the past several years, which Pope in turn attributed to the firm’s focus on the lower middle market (deals valued at $5–30 million being easier to fund), as well as Woodbridge International’s overall industry exposure. Additionally, Pope noted that  he expects to see less competition for deals in the current environment. Again, however, Woodbridge’s experience painted a different picture: Koenig noted that in the past six months the firm has seen three deals bring in 50+ bids apiece, in addition to one ongoing campaign receiving a record-breaking 396 NDAs!

Mirroring conversations being held outside the panel, the subject shifted towards the question of how deals get done, with moderator Aaron Martinez placing a particular emphasis on seller motivation and themes common to successful transactions. Pope expressed a preference for doing deals with seller representation, saying that deals undertaken without a good M&A advisor were more difficult to close. The panel was impressed by Woodbridge International’s unique Management Meeting Training process, noting that facing prepared and knowledgeable sellers often results in higher bids, as seller preparation generally lays the groundwork for a smoother and therefore less costly transaction process. Answering a question from the audience about who business owners should be asking for advice ahead of a sale, the panel agreed that an experienced deal lawyer is critical for a successful transaction, as lawyers without appropriate experience can hamper negotiations.

Regardless of the macroeconomic landscape, the focus remains on fundamentals, with strong companies continuing to see solid demand. Even if the current market environment were to lead to a recession, the twin forces of aging business owners and record capital flows to private equity continue to bolster long-running M&A volume trends. The overall optimism for dealmaking in 2023 remains intact, despite the occasional apocalyptic headline.