The M&A landscape of 2023 has proven challenging to date. Despite clocking in at $1.3 trillion year-to-date, global M&A remains 38% lower than the same period in 2022.
Federal Reserve tightening, a mismatch between buyer and seller expectations, and a vigilant FTC appear to have led companies to navigate these uncertain waters with heightened caution.
Macro-Economic and Market Uncertainty
The prevailing market uncertainty has driven companies to adopt more conservative cash management strategies versus engaging in M&A. Firms are holding onto larger cash reserves and opting to pay down debt, to avoid refinancing at higher interest rates. Additionally, the tightening measures from the Federal Reserve have made transaction leverage for M&A more expensive, dampening deal-making dynamics.
Differing Exit Assumptions between Buyers and Sellers
Higher interest rates have impacted the valuations of companies with low or negative current cash flow. The terminal value, a significant factor in Discounted Cash Flow (DCF) models, is especially sensitive to interest rates. Acquisition multiples from lower rate environments, like that of 2021, seem expensive on a fundamental basis in today’s interest rate environment to potential buyers. This creates friction as shareholders and management seek acquisition multiples that don’t align with today’s current rates. Additionally, the weight of preference overhang can reduce the proceeds to common shareholders, including founders and management. This is especially true in exits that fail to surpass the valuation of previous financing rounds, which diminishes the incentives for sales at depressed valuations.
Regulation and M&A
Regulatory pressure from the FTC has also contributed to a cooled M&A environment. Lina Khan, the chair of the Federal Trade Commission (FTC), has aggressively sought to regulate M&A with a particular emphasis on technology firms. Khan initially gained notoriety with an article in the Yale Law Journal about regulating Amazon, titled “Amazon’s Anti-Trust Paradox.” Khan’s focus on curtailing M&A activity in the tech sector has cast a shadow on tech deal-making as firms seek to avoid scrutiny from the FTC.
Looking Ahead
Despite the headwinds to M&A, there are glimmers of optimism. Improving inflation data has led to speculation that the Federal Reserve might be nearing the conclusion of its rate-hiking cycle. Additionally, signs of life in the IPO market, evidenced by the successful IPOs of CAVA and Oddity Tech, have the potential to reinvigorate this space and inject fresh energy into M&A deal-making.
Moreover, Lina Khan’s regulatory efforts have faced resistance. The FTC’s defeat against Meta in its acquisition of Within Unlimited, a Virtual Reality (VR) startup, and Microsoft’s victory in securing its Activision deal are two notable failures that could embolden future M&A.
The interplay between market uncertainties, regulatory dynamics, and economic outlook will continue to shape the future of M&A for the rest of 2023 and into 2024. At Liquid Stock, we can help shareholders and option holders unlock the value of their equity before M&A or IPO events via our tailored solutions. Connect with our expert team today to learn about your options.
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