Resilient. If there was one word to describe the economic and market reactions to historical interest rate increases and banking crisis fears, resilient is that word.
If there is a word for the second half of 2023 in terms of M&A activity, that word would be optimistic.
A mid-year report released by RW Baird and Company shed some interesting thoughts on the outlook for dealmaking.
For the first half of the year, M&A deal count was down by 25% compared to the first half of 2022. It is no surprise that one of the reasons cited was recession fears. With the Federal Reserve Open Markets Committee engaging in a stubborn fight against inflation through last year and into 2023, many economists have feared the “hard landing” recession to emerge.
To date, however, the economy has been steadfast, which may bode well for deal activity later in the year.
In addition to recessionary fears due to inflation fighting, deal activity has been affected by the impact of higher interest rates themselves, making it more difficult to find profitable deals at higher rates.
While it seems like a distant memory already, the venture capital banking crisis in March had a chilling effect on the private equity and venture capital (VC) world.
Yet another inhibitor to deal making, which occurs when markets are uncertain, is the spread between buyer and seller expectation of a fair price.
The Baird report, however, notes reason for optimism for M&A in the second half of 2023.
Market participants are seeing the economy seemingly absorb the higher level of interest rates, and there is a general belief that rates have likely peaked.
The Baird report notes reason for optimism for M&A in the second half of 2023.
Baird notes the possibility that the Fed may cut rates within the year, which could be a catalyst in favor of deal activity.
Private equity firms need to create liquidity events and exits from existing positions, as fundraising was affected earlier in the year with VC banking concerns.
In addition, there is a backlog effect of potential sellers who were reluctant to sell in the latter-half of 2022 and early this year, who may be willing to move forward.
Of interesting note for the downstream energy space is the observation that “among buyers, we [Baird] have observed broader demand for assets in the lower middle-market ($10-50 million EBITDA) relative to larger cap platforms due to financing availability and risk tolerance considerations.”
In general, Baird concludes that the second half of the year might be setting up like the recovery in M&A activity in the second half of 2020, which ultimately led to a banner year in 2021.
In 2023, recent industry M&A activity has largely been attributed to interest in carbon capture and storage (CCS).
In July, ExxonMobil announced the $4.9 billion acquisition of Denbury Inc., an experienced developer of CCS solutions and enhanced oil recovery.
In a press release, ExxonMobil Chairman and CEO Darren Woods said, “Acquiring Denbury reflects [ExxonMobil’s] determination to profitably grow our Low Carbon Solutions business by serving a range of hard-to-decarbonize industries with a comprehensive carbon capture and sequestration offering.”
Additionally, Buckeye Partners acquired Elysian Carbon Management from EnCap Flatrock Midstream in July. Elysian provides integrated end-to-end CCS solutions to industrial, power and similar facilities seeking to transition to lower carbon products to advance emissions reduction goals.
Other low-carbon value chains, including CCS, hydrogen, ammonia, biofuels and direct air capture have proven to be of interest to industry leaders.
Building a responsive business that is adapting to the needs of the future while serving the energy needs of communities today is key to meeting sustainability goals and strategies.
All in all, coming off a run of historic interest rate hikes and a near banking crisis, things could be a lot worse in the M&A world. With a backlog of potential deals and the economy and markets absorbing higher interest rates, with the potential for rates to come down, the second half of 2023 shows a lot of potential.
For more information, contact Jeremy Osterberger or John Zapalac at ivsinvestmentbanking.com or call (281) 538-9996.
