Despite a significant drop in transaction volume, dealmakers remain optimistic

The second half of 2022 was far from straightforward for global M&A. This was certainly the case in the UK, where economic and political turmoil played out against an international backdrop of ongoing war in Ukraine, inflation and rising interest rates.

This turmoil and uncertainty was reflected in a broad range of measures in UK&I M&A, notably a 23% decrease in buy-side transactions in H2-2022 when compared to H1-2022. There was also a fall in EBITDA multiples across a range of sectors, standing in contrast to H1-2022 when multiples remained relatively buoyant.

These are the most important findings of the UK&I M&A monitor, the periodic survey from Dealsuite that looks into M&A market trends in the UK&I. Our research was drawn from 327 M&A advisory firms that focus on companies with a revenue of EUR1-200mn.

Rising rates and cooling activity

In H2-2022, fired by rising energy prices, inflation spiked, forcing central banks worldwide to push interest rates to levels not seen in over a decade. In the UK, the Bank of England hiked the base rate from 0.25% in January 2022 to 4% at year end. With capital more expensive, there was a significant slow down in M&A deal volume, with 47% of advisers reporting a decline in the number of buyers and 63% noting a drop in the availability of financing. Prices were also affected, with 55% of advisors seeing a fall in the selling price of mandates.

Multiples tumbling

The impact of inflation and interest rates also fed through to EBITDA multiples. In H2-2022, the UK&I saw the average EBITDA multiple across all sectors decrease to 5.1x from an average of 5.4x in H1-2022. As in H1-2022, the highest multiples in the second half of the year were found in the Software Development actor (8.1x) and the lowest in the Construction & Engineering sector (3.3x). The downward pressure on multiples were felt sector-wide, with the biggest decrease reported in the Healthcare & Pharma sector, where the multiple dropped from 8.4x in H1-2022 to 7.9x in H2-2022.

Cross-border bonus

A comparison of EBITDA multiples between Western European markets highlights the advantages of cross-border deals, showing how it can be beneficial for strategic investors to look beyond their own market when seeking to make acquisitions or divestments. For example, if an investor seeks to acquire Construction & Engineering companies, the average EBITDA multiple in the UK&I is 3.3x compared to 5.2x in the DACH region.

Tech remains hot… for now

Further, when we compare four of our major Western European markets (Benelux, DACH, France and UK&I), we find the highest EBITDA multiple continues to be in the Software Development sector. There was a public markets sell off in technology in Q4 2022 and Q1 2023, but the multiples paid in M&A for software remains buoyant, suffering from a mere -0.1x decrease in EBITDA multiple when compared to H1-2022. It will be interesting to watch this measure through 2023, and learn if they reflect the public market selloff in Big Tech.

Cautiously optimistic

Given the global turmoil, it’s no surprise to find that 59% of advisors look negatively on the performance of H2-2022. However, the Monitor’s finding conclude on an upbeat note, with 52% of the surveyed advisors expressing positive expectations for H1-2023. Of course, there are unknown, external factors that may further slow the world and our work, but it is heartening to see that the outlook, for the majority of our partners, is optimistic.

Dealsuite CEO, Floyd Plettenberg, believes that the uncertain economic outlook will also encourage M&A activity, as it drives business owners to lock in their wealth. “People looking to offload part of their shareholding is good news for M&A activity because it leads to two instead of one sales transaction: one at pre-exit and one at final-exit when the time comes.”