When it comes to M&A volumes, 2023 was always going to suffer in comparison to the last couple of years. Not helped by inflation, the tech sell-off and another banking crisis, the first half of the year is seeing far fewer deals than the same period last year.
But that isn’t the whole story.
The truth is, buyer demand is as strong as ever. We have more current buy-side mandates than we’ve ever had and pretty much every buyer we talk to is planning multiple acquisitions this year. If that seems odd in the current climate, bear with me – there are a few reasons why.
Firstly, the biggest underlying driver for M&A in this sector and most others is the need to keep pace with the evolution of technology. Obviously, that isn’t slowing down, and so the search for contemporary skills and tech continues.
Secondly, a noticeable number of buyers stayed out of the peak of the market – believing it more prudent to wait for demand – and therefore prices – to normalise. But their strategic needs haven’t gone away, so that’s created a lot of pent-up demand which is now entering the market looking for better value.
Thirdly, extensive private equity investment over the last few years has created a glut of PE-backed platforms that need to build and return value to investors. They need M&A to drive their promised returns and they can’t afford to hang around.
Many of these plans were laid on the assumption that valuations at the scaled end of the market would be sustained. They haven’t – as witnessed by a couple of high-profile digital marketing groups that have shelved their refinancing plans after testing the water.
So PE-backed groups in buy & build mode need to be careful to maintain some arbitrage between the prices they’re paying and the price they might sell at in the future. Another group of buyers looking for better value after the peak.
But ironically, with so many buyers in the market for agencies and consultancies at the mid and lower end of the scale, prices have not come down as much as these buyers had hoped. And that is simply due to a lack of supply to match buyer demand, which is creating more competition for desirable targets.
The main reason for that lack of supply is that a lot of companies have had a tough start to the year, with fewer pitch opportunities and clients across the board delaying or cutting budgets – especially in the tech sector. That has created more uncertainty over their 2023 forecasts, so unsurprisingly they are hesitant about starting a sale process.
But over the last few weeks, there’s been anecdotal evidence that client budget constraints are easing and there seems to be increasing optimism about the second half of the year. We’ve also seen more creativity in deal structures, designed to mitigate the impact of recent trading, in the interests of persuading reluctant sellers to engage.
So for those founders who are considering their strategic options, the news is that there are plenty available, and whilst we won’t see another valuation spike in the foreseeable future, in our experience, multiples are still trending ahead of pre-pandemic levels.