With recession fears subsiding, CFOs are preparing strategies around buying or selling their way toward growth goals. While sellers have been able to cash out in the current market, buyers are continuing to face hurdles to access financing because of rising interest rates.
Over two-thirds of companies said they were preparing to be a part of some type of M&A transaction at the beginning of the year, and the economy has remain stable despite a hawkish Fed and steady inflation. This confidence, often high among finance chiefs, may continue to bring both buyers and sellers to the M&A table.
M&A professionals are predicting an uptick in deals, according to a Grant Thornton report that surveyed 150 U.S.-based M&A professionals including investment bankers, M&A attorneys, PE investors, and CFOs. So much so, that nearly all (99%) of those surveyed said they expect M&A deals to increase over the next six months, with 11% forecasting a significant increase.
According to the survey, the top industries to see upticks in M&A activity in the next six months will be banking and healthcare, along with a mixture of technology, media, entertainment, and communications.
“Valuations are down, and corporates are sitting on a lot of cash,” said Elliot Findlay, national managing partner of Grant Thornton's M&A practice. “They’ve got the cash on the balance sheet, and ultimately they are ready to deploy to buy companies at low or depressed values.”
Rising Rates Call for New Strategies
While leaders are aware of rising interest rates and their likelihood to stay, they are still a factor that deters deals from taking place, survey results found. Three in 10 (30%) of respondents said they executed fewer deals because of rising interest rates. However, despite rates not decreasing, M&A expectations remain high because buyers have found new ways to secure capital for their acquisitions.
Nearly two-thirds (66%) said they had explored “alternative financing plans” to power M&A transactions. The survey also highlights increases in both private funds and net asset value financing growing, as traditional financing options are increasingly less available than in previous years when capital was much more accessible.
Equity, a factor that CFOs have said employees are seeking more frequently, is also being increased to sway favorable financing at the organizational level. Nearly half (45%) of respondents said they are increasing equity in their deals to avoid high-interest loans.
Impact On Private Equity Deals
Private equity firms are responding to the scarcity of quality financing and the constraints around lending. Eighty-one percent said they are searching for alternate financing due to lending constraints, 59% are holding their assets longer, and 48% have accelerated efforts to refinance.
Surveyors believe the private equity space will begin to cough up assets they should have long ago, in what they refer to as a “glut” of overdue exits. According to them, the private equity space’s uptick in deals may be more of a response to further uncertainty rather than an opportunity to grow.
“Growth drives valuations,” said Findlay. “And I just don’t know anyone that’s coming out with really aggressive growth forecasts right now across a whole variety of industries.”