By: Elle Cathey, Senior Director, Product Marketing

Worries about the near economic future have slowed the rampant growth of US M&A activity, though it hasn’t yet ground to a halt. Datasite’s H2 2022 Market Outlook report shows that dealmaking remains surprisingly resilient in many sectors. We brought together a panel of the leading lights in M&A to talk through these trends, and to give some insights into best practices for the turbulent months ahead.

Where is the Market Headed?

Moderator Abby Roberts, Senior Director of Datasite Insights, opened with a big-picture poll question: how will M&A activity trend in the second half of 2022? Audience responses were mixed, but the biggest group - about a third of viewers - said that they expect a decrease. 

Despite this less-than-stellar outlook, the data offer reasons for optimism. Globally, deal volume is up 9% year-over-year, even after 2021’s extravagant numbers. The Americas are contributing the least to this increase, up only 2%, while the Asia/Pacific region has increased by 32%. The hottest sectors are real estate and business services, with industrials also making a strong global showing.

Alex Lykken, a Senior Analyst at PitchBook, also offered some insights from his company’s data. “A lot of what we’ve seen in 2022 is carryover from deals that were agreed to in the back half of 2021,” he said. That makes it hard to be sure whether the current level of activity will hold up.

Some clear trends are emerging, though. Lykken said that add-ons remain popular, and investors are more deliberate than ever with the buy-and-build model in a turbulent environment.

What’s Fueling Continued Growth in Deal Volumes?

The next poll question asked what’s pushing transaction numbers up in the face of recession fears. Most audience respondents highlighted option A: the high levels of dry powder that remain on private equity and corporate balance sheets. That was the panel’s take, too. 

“I would have said A with an exclamation point!” said Will Chuchawat, who heads up PE and M&A for Proskauer Rose. “The money has to go somewhere.”

He added that recent history suggests that even volatile markets can only hold back capital for so long.  “Uncertainty causes people to wait and see for a quarter, maybe two. Then when they see the world didn’t end, dealmakers start fishing for opportunities.”

Add-Ons Remain Attractive

Surprising no one, add-on activity is still growing, currently making up more than half of global private equity deal volume. The panelists and audience overwhelmingly expect buy-and-build trend to continue.

“We’re going to focus very heavily on add-ons,” said Carrie DiLauro, the Director of Operations and Marketing for Hamilton Robinson Capital Partners. “Organic growth is not enough to overcome the values that we’re being asked to pay these days to win a deal.”

Justine Mannering, Managing Director at Stifel, noted that pursuing add-ons can help PE firms beat out the competition for deals. “When a private equity group has an asset in a sector that they’re really deep in, it gives them the ability to get in front of those add-ons earlier.”

Chuchawat added that value creation is often easier with add-ons. The existing knowledge base within a platform company helps in taking advantage of synergies and spotting opportunities for growth.

Valuations Remain in Flux

What will happen to M&A valuations as we head into the second half of 2022? Most viewers predicted a slight decrease. The speakers suggested that the answer will vary a lot between sectors.

DiLauro, whose firm focuses on industrials, hasn’t seen any appreciable drop in valuations.  Other areas, like consumer goods, are significantly down and will probably continue to dip as the market swings back from the highs of 2021.

“We’ve seen the public market valuations come way off, even below historic averages in some cases,” Mannering said.

This could represent an arbitrage opportunity for private equity investors. Lykken remarked that many public companies are trading even below their underlying asset values, making them attractive targets for PE buyouts.

Inflation and Regulation: Speed Bumps For M&A

The experts agreed that some of the slowdown from last year’s growth rate is due to surging inflation. Many buyers are waiting to see how inflation will affect the profitability of potential acquisitions.

Another factor that’s putting a damper on some deals is the stricter regulatory environment in the US. Tech has been hit particularly hard, due to the combination of antitrust attention and increased worries about cybersecurity.

“To me it’s not whether you get hacked, it’s when,” said Chuchawat. The specter of data breaches is causing buyers to dig deeper on assessing the cyber risk profile of potential targets. One thing to watch on the horizon is states rolling out stringent new privacy laws.

Adapting to an Uncertain Future

Turning to best practices, the panel suggested dealmakers should take more time to discuss valuations and work through due diligence. With choppy economic waters ahead, it’s important to make sure that the fundamentals of any acquisition are sound.

DiLauro also recommended taking advantage of tech tools that allow firms to hunt for the most relevant deals. Partners like Datasite and PitchBook, she said, can help broaden the range of possible acquisitions.

Investing in business development will be crucial for locating the targets that are thriving in the face of cost increases and supply chain disruption.

“I tell buyers to look at whether the target has managed to maintain margin despite the inflation,” Chuchawat said. He mentioned that several companies have managed to increase prices even beyond what’s necessary to offset inflation costs. Businesses that have been able to maintain or increase margin in an inflationary world  will be attractive buys in the months ahead.

Deals Are Down but Not Out

Though fears of a recession are looming large, the M&A market has, by no means, ground to a halt. Dealmakers have to modify their playbooks, focusing more on add-ons and other alternative strategies. But our panel discussion suggests that there are still lots of opportunities to build robust, long-term value.