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M&A: Overcoming Challenges and Embracing Opportunities

Overcoming Challenges And Embracing Opportunities 72 06

Commentary by Jim Zipursky, Chairman & CEO of Corporate Finance Associates Worldwide, a Strategic M&A Partner of TSG

To quote Jerry Garcia: “What a long, strange trip it has been.” Q1 2023 is in the books, and we have seen a roller-coaster of events in the M&A market: recessionary times are discussed daily in the news; inflation concerns continue; interest rate increases remain; unemployment is at record lows, and 10 million jobs remain unfilled in the U.S. alone; the Dow, DAX, LSE and other exchanges saw recovery but with many peaks and valleys; and the COVID hangover lingers. These collective factors have created a challenging environment for M&A across the payments industry as well as others in early 2023. As we head through Q2 and beyond, below are some key takeaways impacting the M&A landscape ahead.

Venture Capital
  • While SVB’s collapse has undoubtedly impacted the U.S. Venture Capital (“VC”) market, Q1 2023 was already in bad shape. Late-stage deal value suffered a huge drop in Q1, declining for the seventh straight quarter to just $11.6 billion.
  • Only 19 late-stage “mega-rounds” were completed in Q1 2023 compared to 98 in Q1 2022
  • Overall, U.S. VC deal count declined by more than 25% in Q1 2023 compared to Q1 2022
  • The lack of new deals puts pressure on valuations; in Q1 2023, median late-stage VC pre-money valuations fell by 16.9% from the 2022 full-year average
  • Only $5.8 billion in exit value was closed on VC deals in Q1 2023, representing less than 1% of the total value generated by exited in 2021 (the high-water mark for exit values)
  • Q1 2023 also shows a significant decline in fundraising for VC funds. 2023 is on pace for the lowest fundraising total since 2017.
  • Global M&A activity in Q1 2023 ebbed to its lowest level in over ten years. Global M&A volume for the quarter declined by 48% compared to Q1 2022.
  • In North America, deal volume declined by 44%, European deal volume decreased by 70%, and Asia/Pacific deal volume fell by 29%
  • The decline in deals was felt across all sizes of deals. Small deals (less than $100 million purchase price) activity in Q1 2023 was at its lowest level in five years
  • As interest rates have risen, buyers who use leverage for transactions must put more equity into their deals. Otherwise, offer lower purchase prices…or both…driving lower valuations and deal volume. This is especially prevalent in the private equity sector.
  • The number of “large deals” announced in Q1 2023 was the second lowest amount in three years; the number of large deals announced in the last 12 months is the lowest in five years.
  • The collapse of SVB and Credit Suisse sent ripples through the market and gave buyers pause for concern about the financial markets in general and M&A specifically
M&A-Fintech Industry
  • What was expected to be a strong year in Fintech M&A is not proving out thus far. Market uncertainty, rising interest rates, and a declining VC ecosystem led to a decline in M&A activity in Q1 2023.
  • According to several sources, the market is screaming for profitability within fintech companies. For example, while the Nasdaq rose almost 17% in Q1 2023. However, stocks of the fastest-growing fintechs were generally flat or lower for the quarter.
  • The value of fintechs remain somewhat depressed. This is a function of lower earnings, interest rate pressure, and concerns about consumer spending.
  • Continued concerns about economic drivers will put pressure on deal valuations throughout the rest of 2023
Recurring/Reoccurring Revenue Rules
  • A constant theme heard from buyers: “we want to see recurring or reoccurring revenue.”
  • Buyers will pay more for companies with demonstrable, measurable reoccurring or recurring revenue streams.
  • Business owners who can clearly and concisely point to their companies’ recurring or reoccurring revenue streams/sources will generally earn much higher valuations than similar companies without the same recurring/reoccurring revenue levels.
  • Payments companies are well-positioned to benefit from buyers’ focus on recurring revenue.
  • Regarding payments companies – buyers are also keenly aware of churn and attrition rates. Business owners who can show their payments companies’ churn/attrition rates (and how these rates compare to industry peers) will benefit in terms of their valuation from their transparency.

Despite the challenges of Q1, there are reasons to be optimistic about the M&A market in the coming months. There remain record levels of capital to deploy (more than $2.2 trillion, of which more than $950 billion is earmarked for M&A), which means we will continue to see M&A and VC activity.

M&A activity across the payments landscape has shown resilience even during economic downturns, proving that this industry can create fruitful long-term investment opportunities. While economic factors have influenced M&A movement in payments during Q1, the future outlook for the rest of the year has some positive attributes. Interest in payments and fintech continues to draw more attention.

Even while companies seek to reduce costs and improve efficiencies during this time, exploring M&A opportunities can prove beneficial for staying competitive and increasing one’s market share across the industry. Buyers and sellers should remain active and prepared to take advantage of opportunities.

Looking back to last year: M&A Winter – Despite Headwinds, Interest in Attractive Opportunities Remain

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