Reduced activity in large deals, but an active mid-market remained.
By Wouter Temmerman
In a particularly challenging economic context, the Belgian (and global) M&A market in 2022 has sought and found salvation in smaller deals.
This is evident from the tenth edition of the Vlerick Business School M&A Monitor. This annual survey asked 155 Belgian mergers and acquisitions specialists in the first quarter of 2023 about the deals they were involved in in 2022. For mergers and acquisitions with a value above five million euros, more than half report reduced activity.
The analysis of global M&A activity in 2022 shows a double picture: after a solid first half of the year in line with the peak of 2021, a slowdown followed. In June, the market reached a turning point when central banks initiated a cycle of successive rate hikes. The long-term macroeconomic and geopolitical uncertainty also made a proverbial contribution at that time.
DECREASE IN THE NUMBER OF DEALS
If we take a closer look at Belgian M&A activity, we also see a multifaceted picture in the M&A Monitor. While 45 percent of respondents saw a significant decline in the number of deals in 2022, around a quarter saw no significant change. According to 31 percent of respondents, M&A activity has actually increased since 2021. By comparison, in 2021 almost three-quarters of the experts surveyed stated that M&A activity increased.
“Our respondents disagree about how the Belgian M&A market will behave in 2022,” says Mathieu Luypaert, Professor of Corporate Finance and Mergers & Acquisitions at Vlerick Business School. He conducted this study together with Doctoral Researcher Gianni Spolverato and research associate Tom Floru. “To understand why, it is necessary to look in detail at the types of deals that have been closed. We see very pronounced results there.”
DECREASE IN THE NUMBER OF DEALS
If we take a closer look at Belgian M&A activity, we also see a multifaceted picture in the M&A Monitor. While 45 percent of respondents saw a significant decline in the number of deals in 2022, around a quarter saw no significant change. According to 31 percent of respondents, M&A activity has actually increased since 2021. By comparison, in 2021 almost three-quarters of the experts surveyed stated that M&A activity increased. “Our respondents disagree about how the Belgian M&A market will behave in 2022,” says Mathieu Luypaert, Professor of Corporate Finance and Mergers & Acquisitions at Vlerick Business School. He conducted this study together with Doctoral Researcher Gianni Spolverato and research associate Tom Floru. “To understand why, it is necessary to look in detail at the types of deals that have been closed. We see very pronounced results there.”
SMALL DEALS SHOW THE MOST RESILIENCE
If we look at the evolution per size category, the market shows more resilience in the smallest deal segment. For transactions with a value of less than five million euros, two in three respondents report that transaction activity has remained stable or even increased since 2021. In the medium-sized segment (five to 50 million euros), almost half report reduced activity. This percentage even rises to 54 percent for deals of more than 50 million euros. “That is not a real surprise, our M&A Monitor from last year already predicted that the global economic downturn would mainly affect the larger deal segments,” says Mathieu Luypaert.
MANY LITTLE THINGS MAKE BIG THINGS
The markets' interest in smaller deals is no surprise and, according to experts, fits perfectly into the vision of companies with a thorough M&A policy. “The increase in smaller deals can also be explained by an increased focus on transactions involving parts of a company,” explains Mieke Van Oostende, Senior Partner McKinsey & Company and keynote speaker during the presentation of the M&A Monitor 2023. “Acquirers want to improve their portfolio optimize and end up with smaller deals. But there's more. You cannot shrink to glory and then non-organic growth through M&A remains important. The companies with a real M&A strategy do three, four or five transactions per year. Five smaller deals together still represent an important part of the company value.”
CONSERVATIVE PRIVATE EQUITY
Vlerick Business School researchers made a second striking observation from the analysis of M&A activity in 2022 when comparing strategic and financial buyers (such as private equity players). The figures show that 46 percent of financial players reported a decline in deal activity. For strategic buyers, this concerns only 35 percent, while 32 percent of them also report increased acquisition activity. For financial buyers this is only 24 percent. “Our results confirm academic research showing that financial buyers tend to lose market share during periods of high interest rates as they rely more heavily on debt to finance transactions,” explains Mathieu Luypaert.
DRY POWER
However, Luypaert does not fail to add a critical note to this scientifically substantiated conclusion about the reflex towards debt financing. “It remains a strange phenomenon, because if interest rates rise, wouldn't you expect these financial buyers to make more use of their cash reserves?” Yves Slachmuylders, Partner at McKinsey & Company, doesn't agree with him and explains the phenomenon based on the influence of economic environmental factors. “The market indeed still has a large amount of dry powder available and the willingness of the banks to provide financing in 2022 was quite complicated. Private equity funds have become more cautious and in 2022 we saw a mismatch between sellers' expectations in terms of valuation and the new reality of a disrupted environment with unclear economic prospects. Many deals were tested on the market, but never actually entered a sales process. Private equity funds continue to probe the market, but we expect activity to increase. Either in the second half of this year or early next year. And at that moment the dry powder will certainly start to dwindle.”
AVERAGE MULTIPLE REMAINS AT RECORD HEIGHT
From the role of the valuations cited by Yves Slachmuylders, it is interesting to look at the results of the M&A Monitor 2023. After all, the previous edition yielded a record level for valuations. On average, 6.7 times the EBITDA value (the operating cash flow) was paid for the acquisition of a company in all size segments. For 2022, the average EV/EBITDA multiple of the deals respondents were involved in ranged from 5.0 for the smallest deal segment to 9.1 for the largest deal segment (above 100 million euros).
Despite the gloomy economic conditions, the average multiple across all sectors remained stable at 6.7. This confirms the record high compared to the start of the measurements in 2013. However, Mathieu Luypaert qualifies the figure. “The stable valuations mainly apply to smaller transactions. We see a small correction in multiples for the largest size segment. This makes sense because such transactions require larger amounts of external debt financing. Moreover, such transactions often involve multinational organizations. They are more sensitive to geopolitical tensions and macroeconomic factors such as inflation and exchange rates.”
PRESSURE FOR BIGGER DEALS IS HERE TO STAY
The expectations for 2023 are in line with the trends identified by the M&A Monitor for 2022. The experts surveyed again see positive signals for the smaller deals for the current year, because they are less dependent on external financing. In contrast, more than half of respondents expect M&A activity to decline in 2023 in the two segments above the twenty million euro threshold. It is also notable that 36 percent of respondents expect a significant increase in future mergers and acquisitions for strategic buyers. Only 24 percent of respondents see the increase that Yves Slachmuylders expects among financial buyers. “In general, these results are in line with the expectation that interest rates are unlikely to fall in the short term,” concludes Mathieu Luypaert, “so that pressure will continue, particularly on larger deals.”
Download the full M&A Monitor here.
