Dealmakers had anticipated a rebound in active auction processes after Labor Day, but they have yet to transpire. They give several reasons for what’s happening in today’s market.
“Earlier in the year, there was talk that the sell-side processes would kick off in September, after Labor Day,” says Omar Pringle, partner in Morrison Foerster’s mergers and acquisitions group. “I’m not seeing it.”
Pringle adds one of the reasons for a pause in dealmaking is that buyers are waiting for sellers to agree to lower valuations. The dealmaking slowdown is “not because buyers are done buying or out of money. They’re watching to see if they can get a better deal in a couple of months.”
Sellers still expect the same multiples they got in 2021, Pringle says. “Buyers are dealing with inflation, tightening credit markets, the possibility of recession. They’ve hit pause.”
While sellers look for buyers to believe in their story, acquirers are waiting to see how the dealmaking environment is next quarter, adds Pringle. “At some point, deal flow returns to normal. Sellers only sit on the sidelines for so long.” Deal flow will increase “when there’s more alignment between the buyer’s and seller’s valuation expectations. “
Another factor slowing deal flow is the declining stock market has put pressure on limited partners, says Brian Flanagan, practice leader at NFP, an insurance consultant. As stocks lose value, LPs become overallocated in private equity investments.
“Many LPs are pumping the brakes on new investments into PE because their allocation is off kilter due to the hit the public markets have taken,” Flanagan says. “This is causing a slowdown in fundraising across the board. While most PE firms have plenty of dry powder for future investments, there is still some anxiety that raising their next fund is proving more challenging due to the current stock market.”
Pringle says the market is in a reset right now.
“Things are not going according to plan,” adds Pringle. “There’s a renewed focus on right sizing and a flight to quality. A few years ago, acquirers were a lot more willing to gamble. Now there’s a real flight to quality. A focus on cash flow, balance sheets and confidence in growth prospects.”
The editors of Mergers & Acquisitions are hosting a webinar on November 2: M&A and Valuations in a Recessionary Environment. Click here to register.