The 2024 M&A Outlook: Despite Challenges, Opportunities Abound

The 2024 M&A Outlook: Despite Challenges, Opportunities Abound

Global M&A Looks Different Today Than in Recent Years

Whether you’re a current owner exploring strategic partnership options, a buyer looking to grow your business via acquisitions, or an advisor or partner to such companies, you’re likely well aware of how challenging the current market is today. With a variety of factors influencing deals, forming a clear, actionable M&A outlook is far from simple. The most notable of these factors include:

  • Rising inflation
  • Wage inflation
  • Rising materials costs
  • Skilled labor availability
  • Rising cost of capital

These elevated costs and influencers of costs have made a significant impact on global M&A market values. As reported in Bain’s 2023 M&A midyear report, deal value in the first quarter was down 44% year to date — the lowest it’s been in 20 years. Even in the middle and lower-middle markets, deal value is down considerably.

Additional Deal-Making Deterrents

As a result of the economic factors mentioned above, financing for transactions continues to be challenging to obtain. Higher interest rates, stricter requirements, and more extensive due diligence are just a few of the many barriers preventing companies on the debt side. In the private equity realm, firms slowed dramatically on investments in recent years — instead prioritizing exits and divestitures.

On top of this, there has been and currently is a supply shortage of strong companies to invest in for buyers considering growth via acquisitions. Companies that specifically needed funding support during the pandemic are beginning to see that capital dry up, and as a result, distressed transactions are on the rise. Businesses that were unable to stand on their own by this point after the pandemic have led the way in distressed transactions, but those that were able to perform well and withstand the turbulence of recent years are seeing more attractive valuations.

Despite the Downturn, Deal Opportunities Remain

While private equity firms have been more stringent with their investments, one thing they certainly are not is light on dry powder. According to S&P Global research, private equity firms were sitting on a record $2.49 trillion around the middle of 2023. This represented an 11% increase over December 2022, indicating that despite reluctance to invest capital, firms were by no means slowing down the raising of that capital.

While much remains to be seen in the months ahead, it’s become clear that the market has been shifting more toward smaller deals. In particular, opportunities for companies to add to their capabilities stand out along with deals that focus on enhancing companies’ competitive positions in their respective markets. Organizations considering a strategic move in the year ahead should be prepared to act when the opportunity arises. In the meantime, leaders and advisors should closely monitor financial and capital markets, the supply of equity capital, the health of the banking system, and non-banking funding.

In Our Corner of the Middle Market

At MelCap Partners, we have not encountered the downturn seen in other areas of the middle market. This year represents a record for our firm, and we are still seeing significant quality buy-side and sell-side opportunities. We are still seeing a demand to deploy capital from private equity firms and other strategic buyers. Primary challenges, however, remain similar to what others have experienced thus far: finding strong talent and navigating a higher cost of capital. As other market factors continue to adjust, we hope to see improvement in those two specific areas.

Despite this, we continue to remain humble and fortunate to partner with many talented, driven organizations considering what is likely one of the most important transactions they will ever make. We continue to expand our reach, thanks in part to our involvement in Globalscope, in support of these businesses. Two of our most recent transactions for the year involved international buyers, and we were honored to play a pivotal role in those deals.

As We Look Ahead to 2024

Now in our 24th year of business, we are proud to have accomplished a great deal for those who entrust their most important transactions to our talented team. Most recently, we were selected as a 2023 Cascade Capital Corp. Business Growth Award Honoree. We have served as the financial advisor for numerous clients in their transactions, and are looking forward to partnering with even more in the year ahead to help them achieve their strategic goals.

If you are considering a purchase or sale of a business in the year ahead, we’d enjoy the opportunity to speak with you and learn more about your objectives. Reach out to us today to learn more about our capabilities and how we can support your success.

By Al Melchiorre

Al founded MelCap Partners in 2000, and is responsible for managing all aspects of client engagements from proposal through closing, developing business, reviewing offering memorandums and financial models, negotiating purchase agreements, and interacting with buyers and investors.