Large proportion of transactions are below 7x EBITDA

The Argos Index from the European private equity firm Argos Wityu tracks the valuation of unlisted European SME companies. After a decrease of multiples in the last quarter, valuations now seem to have stabilized in Q4, 2023.

The M&A activity was heavily impacted by the adverse 2023 macro-economic environment of inflation, interest rates hikes, slowing growth, and geopolitical tensions. Mid-market activity was down 10 percent in volume and 25 percent in value in 2023, as the LBO (Leveraged Buy Out) segment dropped by 12 percent in volume and 30 percent in value.

Sellers’ prices have gradually adjusted to this environment, as shown in the 10 percent price decline in 2023, and the high proportion of multiples below 7x EBITDA.

However, both transaction multiples and M&A activity have stabilized in Q4, as financial conditions may be shifting. With decelerating inflation and dropping long-term interest rates, equity markets rebounded quickly. Investment funds volume activity was up 20 percent this quarter, backed by record levels of dry powder.

Multiples paid by strategic buyers decreased by 4 percent at 8.7x EBITDA in Q4. Large corporates continue to look for transformative acquisitions and lower-priced opportunities as they keep a high share of the M&A market in Q4 (85% in volume).

Multiples paid by investment funds were stable at 9.4x EBITDA, despite the higher-rate environment that drives up their borrowing cost. They remained resilient and opportunistically deployed more capital this quarter. They still benefit from record dry powder and continue to make selective acquisitions of quality assets be it at higher prices.

40 percent of the transactions in Q4 2023 are at extreme multiples < 7x or > 15x EBITDA, down from last quarter, but still at a high level. However, the proportion of transactions at multiples > 15x EBITDA continues to decrease, as prices are both falling and converging.

Transactions at multiples < 7x EBITDA account for 28 percent of analysed transactions, a very high level that highlights downward pressure on prices.

In 2023 the global M&A market dropped by 17 percent below 3 trillion dollars, its lowest level in 10 years, while Europe showed the sharpest drop, down 28 percent annually.

Read also: Outlook for global M&A market in 2024