Despite a significant drop in transaction volume, dealmakers remain optimistic

The second half of 2022 was far from straightforward for global M&A. Taking a deeper look into Dealsuite’s core markets, the impacts of ongoing war in Ukraine, inflation and rising interest rates have been felt throughout the European M&A market.

This turmoil and uncertainty was reflected in a broad range of measures in European M&A, notably a 8.5% decrease in buy-side transactions in H2-2022 when compared to H1-2022. There was also a fall in EBITDA multiples across a range of sectors, standing in contrast to H1-2022 when multiples remained relatively buoyant. 

After a small decrease in H1-2022, the average EBITDA multiple further declined from 5.4x to an average of 5.2x.

These are the most important findings of the European M&A monitor, the periodic survey from Dealsuite that looks into M&A market trends across Europe. Our research was drawn from 1,318 M&A advisory firms that focus on companies with a revenue of EUR1-200mn. 

Rising rates and cooling activity  

In H2-2022, fired by rising energy prices, inflation spiked, forcing central banks worldwide to push interest rates to levels not seen in over a decade. Over the course of 2022, the ECB raised interest rates from 0.75% in January to 2.75% in December. The UK saw similar rises with the Bank of England hiking the base rate from 0.25% in January 2022 to 4% at year end. With capital more expensive, there was a significant slow down in M&A deal volume, there was a notable decline in the number of buyers and a drop in the availability of financing.

Multiples tumbling 

The impact of inflation and interest rates also fed through to EBITDA multiples. In H2-2022, Europe saw the average EBITDA multiple across all sectors decrease to 5.2x from an average of 5.4x in H1-2022. As in H1-2022, the highest multiples in the second half of the year were found in Software Development and the lowest in the Construction & Engineering sector with the exception of the DACH region and the Netherlands.where Retail Trade were the sectors with the lowest multiples.

Cross-border bonus 

A comparison of EBITDA multiples between Western European markets highlights the advantages of cross-border deals, showing how it can be beneficial for strategic investors to look beyond their own market when seeking to make acquisitions or divestments. For example, if an investor seeks to acquire Construction & Engineering companies, the average EBITDA multiple in the UK&I is 3.3x compared to 5.2x in the DACH region. 

Tech remains hot… for now

Further, when we compare four of our major Western European markets (Benelux, DACH, France and UK&I), we find the highest EBITDA multiple continues to be in the Software Development sector. There was a public markets sell off in technology in Q4 2022 and Q1 2023, but the multiples paid in M&A for software remains buoyant, suffering from a mere -0.1x decrease in EBITDA multiple when compared to H1-2022. It will be interesting to watch this measure through 2023, and learn if they reflect the public market selloff in Big Tech.  

Cautiously optimistic 

Advisors in all markets had a negative view of H2-2022, which comes as no surprise given the global turmoil. However, this monitor also asked advisors to give a projection for H1-2023; the majority of the surveyed advisors expressed stable or positive expectations for H1-2023. Of course, there are unknown, external factors that may further slow the world and our work, but it is heartening to see that the outlook, for the majority of our partners, is optimistic.

Dealsuite CEO, Floyd Plettenberg, believes that the uncertain economic outlook will also encourage M&A activity, as it drives business owners to lock in their wealth. “People looking to offload part of their shareholding is good news for M&A activity because it leads to two instead of one sales transaction: one at pre-exit and one at final-exit when the time comes.”