Q3 Another Stinker for M&A, but It May Set Table for Sizable Rebound

The third quarter was yet another laggard for mergers and acquisitions, amid higher financing costs and lender uneasiness, according to research outfit PitchBook. The recent quarter’s deal value was the lowest in 10 years, except for the sorry showing in 2Q 2020, when the COVID-19 pandemic closed down much of the world’s economy.

Still, the PitchBook report indicated that the September-ending period’s bad news carries the seeds of a turnaround, likely to come at the beginning of next year, provided no recession arrives to mess up that timetable. Relevant data include signs of lower valuations for companies and a load of free cash on the books of private equity managers and corporations.

“Nearly two years after reaching its zenith in Q4 2021, the downturn in global M&A shows no signs of slowing and in fact accelerated in Q3 2023,” declared the study, written by the firm’s lead PE analyst, Tim Clarke, and his team. But “we believe that the currently weak trend in M&A will give way to an eventual recovery,” likely in 2024’s first quarter.

In this year’s third quarter, global M&A value fell 19.9% from Q2, while for the full year through September 30, deal value is down 22.5%. The deal count was off just 2.5% quarter-to-quarter, which the report commented “neatly sums up the current state of play.” That’s because M&A players “are biding time with smaller deals until conditions improve for megadeals.”

In North America, the situation was even worse, with deal count down by 5.8% and value plunging 25.1%.

Corporate buyers, who generally make up the bulk of M&A action, had a greater focus on the larger transactions. Reason: “their ability to issue bonds, while PE buyers struggled in a challenged lending market to secure leverage.”

The biggest announced deal of the quarter was Cisco Systems Inc.’s buyout of Splunk Inc., a data-analysis software company, for $29 billion, as technology titans keep on eyeing acquisitions to fuel their growth. (Splunk has a strong machine learning business.)

In the current quarter, a possible harbinger of potentially better days ahead for M&A is in the oil patch: Chevron Corp. is buying Hess Corp. for $53 billion and Exxon Mobil Corp. is acquiring Pioneer Natural Resources Co. for $59.5 billion.

On the plus side more broadly, the report noted, the “preconditions for a rebound are still there.” First, there’s the global total of $1.4 trillion in unspent PE dry powder, just 9.7% below its all-time high. An even larger cash stash is on corporate books. In the U.S. alone, cash holdings exceeded $4.1 trillion in Q2 2023.

Global transaction multiples are “showing signs of stabilization heading into the end of 2023,” PitchBook observed. In other words, they should be getting cheaper. The median EV/EBITDA multiple—enterprise value of companies in general (equity plus debt and cash), divided by earnings before interest, taxes, depreciation and amortization—held steady at 8.7x for the 12 months that ended with Q3 2023.

“While this is below the all-time peak of 10.6x in 2021 and the average of 10.0x between 2017 and 2019,” the report found, “we find the stability encouraging, as it suggests the cyclical trough is in as long as the U.S. does not fall into a recession.”

Admittedly, that is a big if. M&A historically slumps amid economic downturns, as many potential buyers and sellers are more intent on getting through tough times and not taking chances. But if the economy holds up, M&A could soar once again.