Companies have recently grown hesitant to make acquisitions. However, the challenges for the mergers-and-acquisitions environment should abate later in the year, unlocking more deals.
Total deal value in the U.S. for the first quarter of 2023 was $257 billion, according to KPMG. That’s down 38% from $414 billion in the first quarter of last year. That’s because last year’s first-quarter encapsulated lower interest rates, just before the Federal Reserve began hiking rates in order to slow inflation by reducing economic demand. A year later—right now—rates are higher, and economic and profit expectations have dipped. That means financing costs more, while the expected earnings from deals is lower, making acquisitions a much less attractive proposition for companies.
The year-over-year drop to start 2023 isn’t a surprise to anybody, but the picture for deals has even taken a hit just in the last few months. Deal volume is down 12% from $291 billion just last quarter. It’s possible that the recent banking problem—potentially pressuring economic demand and profits—had some effect. Still, it probably hasn’t had a massive impact because the issue flared up in early March, the tail end of the first quarter. Overall, companies are just hesitant to put big dollars to work in new companies.
“We are optimistic that deal making will return toward the end of 2023 as inflation and rates ease up,” wrote Phil Isom, head of M&A at KPMG. “We are seeing companies working on sell-side due diligence and other M&A prep now so they are ready to sell when the M&A window reopens later in the year.”
Indeed, the picture could easily brighten from here. Rates have been dipping in the past few weeks as the Fed becomes more cautious given the banking issue, which could turn out to be less than problematic. So long as there’s no full-blown crisis, earnings projections could soon bottom and then improve, spurring some C-suite confidence.
For reference, that could mean deal-making above $1 trillion in the U.S. for the entire year. The current annual pace is just below that, right around $1 trillion. If deals recoup their 2022 pace, they’d hit just over $1.3 trillion this year.
Already, a few buyout candidates standout, should market conditions allow for deals. Wolfe Research screened for buyout candidates by identifying stocks that have underperformed their sectors recently and have had recent CEO changes. That means shareholders might be disappointed with recent performance and could been in favor of a sale. The firms on the screen have market capitalizations no greater than $25 billion so a purchase is feasible for a buyer and net debt no greater than four times expected earnings before interest, tax, depreciation and amortization (Ebitda), so there isn’t too much financial risk.
One example is Macy’s M +0.23% (ticker: M). CEO Jeffrey Genette joined in 2017. The stock is down about 36% in the past year, worse than the 25% losses for both the SPDR S&P RetailXRT +0.44% exchange-traded fund (XRT) and Consumer Discretionary Select Sector SPDR ETF (XLY). The retailer has a roughly $4.6 billion market cap.
Another is Whirlpool WHR +1.35% (WHR). CEO Marc Bitzer joined in 2017 and the stock has dropped about 31% in the past year, below the SPDR S&P Homebuilders ETF (XHB) mere 3% fall. The company’s market cap is about $7 billion.
Another M&A screen from Wolfe focused on high-growth companies that could be attractive assets for larger technology companies. The potential companies for sale are those with expected sales growth at 10% or higher—which is above the S&P 500SPX +1.42% ’s expected high-single-digit growth according to FactSet—and market caps no larger than $25 billion. They’re also firms with no more net debt than four times Ebitda.
One name on the screen was DoorDash DASH +1.39% (DASH). It’s got a roughly $23 billion market cap and analysts are expecting sales to grow annually at about 17% for the next three years, according to FactSet. It has no net debt, which means it has more cash than debt.
Another is $5.8 billion digital payments technology provider Shift4 Payments (FOUR). Analysts are forecasting annual sales growth of about 23% for the next three years. Net debt of under $1 billion is less than two times expected Ebitda this year of about $470 million.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com