Following near record level valuations in 2021, companies and PE firms forecast stable or higher valuations.
Despite headwinds from COVID-19, supply chain disruptions, labor shortages, inflation and other factors, companies are resilient and optimistic about their performance.
High valuations are not the primary reason bringing sellers to market—fatigue is setting in following months of heavy lifting.
Despite historically high prices, PE firms see a mostly balanced buyers/sellers market, while companies see a slight edge toward sellers.
In Citizen's 11th annual M&A outlook survey, over 400 U.S. businesses and private equity (PE) firms told us the M&A market for 2022 will continue to be strong after a record year in 2021. But there’s plenty below the surface of that trend that is worth digging into. We learned what PE and corporate executives are expecting for their performance in the year ahead, what factors are presenting the biggest challenges, and how they view the current dynamics of the booming M&A environment. Here are four surprising observations from this year’s M&A outlook that are likely to factor in to deal activity in the year ahead.
1 – Even after a record-setting 2021, valuation and volume expectations for 2022 remain high.
Following a record-breaking 2021, it was a surprise to find that companies and PE firms remain so optimistic about deal volumes and valuations for 2022.
Despite significant headwinds, M&A volumes shot higher in 2021 buoyed by record cash levels on corporate and PE balance sheets, strong corporate earnings, a fully recovered stock market and rock-bottom financing rates. According to Pitchbook, there were almost 14,000 U.S. M&A deals in 2021, a 17% increase over 2020. Total M&A multiples were 15.28x EBITDA, the highest they have been in six years. U.S. middle market M&A activity fared even better in 2021, with a 29% increase over 2020, the greatest amount of activity since 2015.
Still, half of middle-market executives said valuations would remain stable in 2022, while another 36% expected them to increase. PE firms, who are arguably more attuned to broader M&A market dynamics, were even more bullish, with 44% of PE firms forecasting higher deal multiples and another 42% expecting stable valuations. In terms of deal volumes, 54% of PE firms said they expect deal flow to increase in 2022, while 33% expect it to look like 2021 while only 13% expect volumes to decrease.
Taken together, these responses tell us that market participants are feeling bullish about the environment.
2 – Despite mounting headwinds, companies are optimistic as they enter 2022.
Companies are not yet free of the pandemic, its follow-on effects and other headwinds. Fifty-eight percent of companies say COVID-19 makes their operations harder, compared to 48% of respondents the year before. Respondents also cite a number of issues connected to the pandemic and the effects of policy interventions, including labor market challenges, commodity prices, the expected rise in interest-rates and raw-material prices, as factors they expect will make operations more difficult. U.S. tax policy changes were also cited as a likely impediment in the year ahead.
Despite these noted headwinds, 94% of respondents expect to meet or exceed their 2021 results. These optimistic responses demonstrate the impressive resilience U.S. middle-market companies have shown amid the challenging operating environment. Their outlook reflects the adjustments they have made. Two years into the pandemic, this backdrop is just the new normal—headwinds and all.
3 – Valuations are not the top reason bringing sellers to market.
We would expect to see historically high company valuations bringing sellers to market. And they are—but valuations are not as high on the “reasons for selling” list as we might have guessed.
Many sellers are coming to the market because it continues to be their best opportunity to find a partner to provide partial liquidity and fuel growth. When we dug deeper into the survey results, however, we found signs that company owners are experiencing burnout, like what is driving a broader wave of retirements across the labor market, driving them to pursue liquidity alternatives.
It is interesting to note the sudden jump in the percentage of sellers looking to sell the entire company rather than a piece—up to 39% of sellers from 24% the year before. When we compared “whole company” sellers to “part of company” sellers, we also saw that their reasons for selling differed considerably. Fifty percent of “whole company” sellers cite the lack of a succession plan. Additionally, 28% say that inflation is hurting the business and 20% say owner fatigue is driving them to sell (up notably from prior years). Owners have struggled and hustled through a tough two years and for some, the exit opportunity is calling. In comparison, “part of company” sellers are coming to market for strategic growth opportunities (40%) or because the division to be sold is underperforming or non-competitive (31%).
4 – Market participants have a surprisingly balanced view of the deal environment.
In 2021 we saw both M&A volume and valuation at or near record levels. High valuations are often a signal that it’s a seller’s market.
But the 2022 survey suggests that PE firms and companies see a surprisingly balanced market, despite high deal valuations. PE firms were split almost equally in characterizing the M&A market as a buyer’s, seller’s or balanced market. Companies were a little more skewed toward seeing it as a seller’s market.
We believe this divergent perspective is likely due to the bifurcated market—where there’s one tier of deals between or among highly sought-after strong performers, the “winners” in the pandemic environment, and a second tier of deals to make opportunistic acquisitions of underperformers, the “strugglers” in the pandemic environment.
Against this backdrop of bifurcated outcomes, the “balanced view” of market valuations looks a little more complex. Companies and PE firms expect valuations and competition to continue at all-time highs for well-performing assets, very much a seller’s market. But there also is a selective buyer's market for companies and industries that have struggled to adapt to the changing conditions. Collectively, market dynamics appear to be shifting toward balance, but it is more likely a tale of “winners” and “strugglers”.
Sellers’ confidence levels are an area where we do see a re-established balance emerging in the marketplace. During the start of the pandemic, sellers’ confidence in completing a deal took an enormous hit. There are many reasons for that, chief among them that sellers wanted to present their strongest stance to the market, but the pandemic introduced uncertainty to their performance outlook. So even if valuations looked appealing, they couldn’t be certain of how their business would fare in those early pandemic months and what the changing operating environment would mean for their marketability.
Going into 2022, sellers reported a hearty rebound of confidence in completing a deal. Confidence is an important component of timing and transaction readiness. Buyers’ confidence never wavered, and they have stood at the ready in the M&A market. As we advance into 2022, seller confidence is back into a supportive zone with the gap between buyers and sellers narrowing—another indicator of balance.
No Surprise: Stressful Deal Environment The survey also produced signs that the current deal environment is particularly stressful. In one telling data point, we saw a jump in the number of buyers who say they prefer to work with a seller who engages an advisor because it keeps deal negotiations at a professional level. The pandemic adds a unique layer of stress to everything, and high valuations also compound the pressure in transactions.
42% of buyers say that they prefer to work with a seller who engages an advisor because it helps keep negotiations at a professional level.
Against this backdrop, we also weren’t surprised to see that the majority of buyers and sellers continue to say they plan to engage an advisor. Sellers look to their advisor for help finding potential offers and in getting the best price, but also to help structure deal financing. Buyers rely on their advisors to speed up the process, to help assess opportunities, as well as to help get the best price.
In summary, Citizens M&A outlook provides evidence of the continued appetite for M&A, among both buyers and sellers, going into 2022. Respondents expect valuations and volume to be as good or better than the record levels demonstrated in 2021 and have confidence in their ability to get deals done. These findings are particularly relevant given expectations for continued headwinds facing businesses in 2022, including ongoing inflation, increasing interest rates, labor shortages, supply chain constraints and Covid-19 dynamics. Despite these challenges, respondents expect a robust operating and M&A environment in 2022.
Key takeaways:
Buyers, sellers and PE firms generally forecast stable to higher valuations and volumes in 2022. Though valuations are historically high, market participants do not see a bubble environment.
Companies are facing considerable headwinds, but many of them continue to adjust to the maturing-pandemic environment—and they remain optimistic about performance.
More sellers are coming to market looking to sell the whole company, a trend that aligns with the jump in retirements across the broader labor market.
Companies and PE firms see a surprisingly balanced market between buyers and sellers, suggesting continued opportunity to get deals done. For those sitting on the fence, 2022 could be a good time to act.
To learn how your company can benefit and best position itself within the M&A landscape, call or email me now to receive 3 hours of free consultative analysis. Our analysis offers clarity, based on your objectives, if a full or partial exit, recapitalization, divestiture, acquisition or pre-sale exit strategy provides the greatest benefit to you and your company.
Vercor has been delivering M&A expertise for over 25 years. We serve as a trusted partner to help build long term, iterative strategies that ensure you are positioned to meet your unique personal and financial goals whether it is selling, recapitalizing, acquiring or divesting of a division. Now is the time to evaluate, strengthen, prepare and increase the market value of your company regardless of your timeframe.
Todd Cummiskey
Vercor
704-926-6564
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