Confidence in the macro environment is a significant driver of M&A activity in this uneven market, says Stifel Financial Corp Managing Director Greg Urban.
"The availability of equity capital — strategics have good balance sheets, sponsors have tremendous amounts of dry powder that they need to put to work, so that's good.," Urban said during the Detroit Smart Business Dealmakers Conference. "The availability of debt capital; that's mixed. Fully syndicated, large financings for large deals, the banks are hung. There's over $40 billion of debt that are hung on banks’ balance sheets that has to clear out before we can have that capital available for large deals again. But private debt, smaller debt financing packages, there's tremendous debt out there and there's a tremendous amount of appetite to put that capital to work."
He says higher-quality companies, lower leverage — from the debt providers perspective higher coupons — they are dying to put this money to work. And that's where the bump in the middle-market on the private equity side can be seen.
"And then it's just cyclical," he says. "People have to do deals, and there's a tremendous amount of pent-up demand. So, we're bursting at the seams to do more deals. And there's just some headwinds that are keeping us from continuing to do those deals today."
M&A is a way to augment offerings, enhance technologies, and remain competitive, especially in the rapidly evolving automotive space. While CFOs and CEOs want to pay down debt, they still want to transact. So, there's a dynamic of trying to be smart and still do deals.
Urban says we're in an environment where most players in the M&A world feels the need to be more conservative, and for good reason.
"If you're a strategic buyer, you don't want to do a bad deal ever," Urban says. "But you really don't want to do a bad deal in this environment. Now, I think deals done in this vintage can be very good deals. Buying at decent multiples, sellers’ expectations have come down just due to the length of the stress in the M&A market, there's pent up demand to sell to. But from a strategic perspective, I think the automotive space is transitioning rapidly around technology. And everyone feels a need to be a part of that through organic activity, but also through M&A."
But the hurdle now is higher, he says, because of the fear of doing a bad deal. But at some price, there's always going to be a transaction that can be done.
"It's just a matter of buying at the right price and having a good story around it, and having it be a company that can deliver what they promise because you don't want to be that buyer that that buys a company and is not able to deliver on the value that you're supposed to get from the transaction," he says.
As buyers look to avoid bad deals, there's an increasing quantity of information being requested that Urban says is extraordinary.
"It's a lot more time gathering diligence assets, getting them into the data room, interacting with buyers, creating new documents," he says. "Buyers are looking through every line of every contract, trying to make sure that that certainty and future business performance is there."
He says in one deal he heard about, a company posted three years of historical financials in the data room, which is fairly standard. The buyer, however, asked for 15 years of historical financials because they wanted to model out what the business did during the Great Recession and how it recovered, and mimic that in their forward model.
"So, it's just harder," Urban says. "All of these deals are just taking more work, more time, more effort, more energy. But on the flip side, buyers are bowing out quicker if they're not going to be all-in and be willing to put that level of effort into a deal. So, the buyers that you have in a process you know are serious."
Going forward, Urban says he's optimistic about the M&A market.
"I don't think we're going to end 2023 down 40 percent from 2022," he says. "We got momentum."
Deals, he says, don't get done in a day. They get done over months.
"We're seeing a lot of activity. I think that will continue," Urban says. "The availability of debt in the private debt market is robust and will be there. I think as we look forward medium-term, the glut of capital tied up for larger deals will work its way through, and we'll start to see activity."