What was last year like in M&A? In what sector did you see the most M&A activity during 2022?
Last year was a bit of a challenge. We entered 2022 when the economy was going strong and ended the year with our biggest pipeline of M&A deals across a variety of industries, including consumer products, healthcare, transportation and more. However, the year was not without hiccups in the dealmaking environment. When the markets dislocated in June/July, a lot of deals went sideways or were put on pause until people got visibility into how the economy would shake out over the next 6 – 9 months. Most deals picked back up in the third or fourth quarter of 2022 and a handful of deals that should have closed end of year have been being deferred into Q1 and Q2 this year.
To put it simply, it was a year that started off strong, went sideways, and picked back up by year-end.
What are your expectations for M&A in the year ahead?
I think that we generally have a positive outlook for dealmaking, especially for the second half of 2023. We have been talking about a recession for 15 months now, which is longer than the recession itself would even last. In Q3 and Q4 of 2022 we saw signs of recession, but, in the consumer space, we largely saw an inventory glut. Supply chains were constrained in 2021, retailers then got overstocked, the FED raised rates, and everyone hit the brakes on consumption. We are still seeing pretty good consumer demand at the retail level, but it is taking time to work through the inventory glut across all channels.
What we expect and what I have seen is everybody trying to manage inventory as tightly as possible, but, once demand gets caught up, the situation will normalize. We are expecting to see a whiplash of inventory glut to inventory shortage in the second half of 2023. Manufacturers will again be scrambling to produce goods in the second half.
What do these predictions mean for Carl Marks Securities?
If the deal market ramps up more gradually, it will be good for us. Sellers will be able to manage the growth and buyers will not view the growth as anything out of the ordinary. They will look at it as a normal resumption of steady revenue growth. This would be great for us and for clients. However, if the deal market spikes too quickly, it gets trickier, because potential buyers will want to get back into the acquisition game, but not to give sellers full credit for a pull forward or a realization of deferred sales.
I hate to be cliché, but we are always hoping for that Goldilocks scenario, where things look healthy but not artificial.
How are valuations being affected in the current market?
Valuations are just as much impacted by expectations in the market as anything else. For example, if a seller’s comparables are at X price one day and double the next, sellers can easily convince themselves that the higher valuations are the new normal. Meanwhile, the buyers do not think that is the actual value, doubting the that company can maintain growth rates and margins to justify it. The expectations reflect a disconnect between buyer and seller.
How do you manage client expectations while valuations are so unstable?
It takes time for expectations to get reset. For example, I think that happened last summer, but by now, people are starting to readjust and understand.
Part of our job is to tell clients that what is going on in the market right now is not a temporary adjustment, it is more long-standing. Sellers need to understand the anomaly was 2021 to the first half of 2022, not now.
However, some companies continue to perform extremely well, take market share, and reinvest in their businesses. Those companies won’t be affected by what is going on in the market because they will be one of the few bright spots out there.
If you are considering selling your business or growing through an acquisition, Carl Marks Securities can help quickly cut through the clutter of rapidly changing, complex issues to identify and execute the best solution.