Carla Nunes
Managing Director
Valuation Advisory Services
Philadelphia
Webinar Replay – 2023 M&A and Financing Outlook - Managing Risks. Finding Opportunities.
April 13, 2023
| ( Online )
Recent market events have challenged private companies looking to raise capital and have also impacted investors looking for alternatives to invest their capital. With the Fed raising interest rates substantially over the past 12 months to stem inflation, valuations have been negatively impacted by the higher rates, while credit markets have seen significant tightening, sending jitters through the economy.
Despite these headwinds, there is reason for optimism as we look ahead to the second half of 2023. During our webinar 2023 M&A and Financing Outlook – Managing Risks. Finding Opportunities, experts from Kroll, CohnReznick and Wilson Sonsini Goodrich & Rosati discussed strategies for success in the current M&A and financing landscape.
Moderated by Karan Kapoor, Managing Director and Co-Head of Kroll’s Technology M&A practice, the panel included Carla Nunes, Managing Director from Kroll’s Valuation team, Jeremy Swan, Managing Director from CohnReznick, and Douglas K. Schnell, Partner from Wilson Sonsini Goodrich & Rosati.
Key Takeaways from the Discussion
The Cost of Capital Remains High Impacting Valuations and Deal Structures
For panelists, the big questions are:
- Will the Fed continue to raise interest rates?
- When will they stop?
- When might interest rates be cut?
The panel cited predictions by Kroll’s Global Chief Economist, Megan Greene, of a 25bp hike at the Fed’s next meeting in early May, and then holding flat from there until the end of 2023. Expectations for rate cuts would be slotted for next year. But there is currently a disconnect between central bank statements and what markets are saying. Futures trading reveal a more optimistic view, where rates would start being cut in the second half of 2023. Meanwhile, market uncertainty and higher interest rates continue to drive up cost of capital to levels similar to 2010 and drive down valuations for both private and public companies.
Take Privates Are an Attractive Option for Late-stage Companies
With an abundance of dry powder to be deployed, panelists agreed that this has been an opportunistic time for private equity firms looking to take undervalued public companies private. Many high-quality companies previously considered overvalued are suddenly affordable. And these companies are now seeing private equity as an attractive way to exit the market, as some boards have come to accept the lower valuations as more permanent.
Valuations Are Causing Misalignment Between Buyers and Sellers
As valuations declined significantly in 2022, a disconnect emerged between buyers and sellers. In the second half of 2022, a clear bid-ask spread emerged, with sellers still expecting valuations at the high levels seen in 2021 and buyers realigning what they were willing to pay. Moderator Karan Kapoor noted that this spread impacted software M&A in the second half of 2022. Software M&A deal volume declined significantly in Q4 2022 and Q1 2023, reverting to levels not seen since 2017.With the dust settling and the bid-ask on valuations narrowing, the number of software M&A deals increased by 23% in Q1 2023 compared to the previous quarter. Additionally, one panelist observed that the private equity market has evolved from just a few months ago, as PE firms get more creative in deal structuring. Co-investment deals are up significantly as PE investors finance M&A deals with equity-only deals. Investors are also doing smaller deals.
The Tale of Two Boards: How to Manage Expectations
While some boards have adjusted valuation expectations, others still expect higher prices than justified by the current market environment. The recent banking crisis has amplified the need to manage risk and expectations. According to the panelists, open communication with boards and management is key. A board expects creative solutions and clear direction, not excuses.
Despite Uncertainty Dealmakers Remain Optimistic
With a backlog of M&A deals waiting to come to market, most bankers and transaction teams are expecting a much more active second half of 2023. As one panelist noted, "As long as we get some comfort that the Fed is done raising rates and that we are not going into a hard landing recession, we will see deals. And there are enough deals in the pipeline waiting to come to market to keep us busy for a long period of time."
Moderator
- Karan Kapoor, Managing Director and Co-head of Kroll’s Technology M&A Practice
Panelists
- Carla Nunes, Managing Director, Kroll, Valuation
- Jeremy Swan, Managing Principal, CohnReznick, Financial Sponsors and Financial Services Industry
- Douglas K. Schnell, Partner, Wilson Sonsini Goodrich & Rosati, Corporate
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