Perspectives – Marc Cooper – August 2023

M&A Outlook: The Case for Optimism

by CEO Marc S. Cooper

Uncertainty is the arch-nemesis of risk taking. Inflationary pressure, higher interest rates, recession fears, and bank system instability — all have contributed to the subdued pace of M&A transaction volume over the past year.

However, a number of recent indicators could imply a revival in the appetite for risk may be underway. Core inflation readings suggest an easing in upward consumer price pressure. That, in turn, has raised expectations that the Fed’s pause in rapid-fire rate hikes may continue, or even turn into a hard stop.

And while the US economy is still forecast to decelerate in the next two quarters, the probability of an outright recession over the next 12 months has been reduced to 20%, according to a recent Goldman Sachs economic forecast.

As the collective anxiety about the economic direction of the US wanes, corporate leaders will feel more confident pursuing M&A activity and embracing the associated risk.

With the economic headwinds easing, market participants will be able to size up potential deals with a greater degree of clarity and precision. A clearer read on valuations and the future direction of borrowing costs is crucial for price discovery and narrowing the bid-ask spread between buyer and seller.

Make no mistake: the coming M&A recovery will almost certainly be a measured one. The easy money that powered the record transaction volumes in 2021 isn’t coming back anytime soon.

Monetary easing by the Fed isn’t expected until early 2024, and that’s contingent to some degree on the inflation rate getting closer to the central bank’s 2% target, from around 3% now. While interest rates are unlikely to rise much further than the current range of 5.25% to 5.5%, neither will they return to the near-zero levels seen prior to the pandemic.

With borrowing costs and valuations elevated, corporate assets need to be marked to market. In other words, corporate assets will need to be appraised at values reflecting current market realities if the financial interests between buyer and seller are to be properly aligned. That process is just beginning.

While a full recovery of the high-yield markets will take time, the middle-market, private equity segment is better-positioned to rebound leveraging the growth in the private credit markets. Private equity firms have a healthy backlog of assets to exit from in order to return capital to their investors.

I don’t pretend to be an oracle when it comes to predicting the exact contours of the emerging M&A recovery. Yet I think it’s a reasonable assumption that the second half of 2023 will see a steady uptick in transactions, setting the stage for more robust performance in 2024.

One thing I’m certain of is that Solomon Partners is well-positioned to thrive as the demand for transactions and capital raising recovers. With a business model anchored in bespoke M&A advisory, we are poised to capitalize on the changing market dynamics.

We don’t try to time M&A market cycles. Instead, we focus on our enduring, core strengths — a cadre of deep industry experts, who are seasoned, trusted advisors, who focus on doing what is right for their clients, today and long-term. With the right mix of strategic foresight and adaptability, I see big opportunities ahead as the deal economy strengthens in 2024.