January 4, 2023

Small Deals: A Bright Spot in 2023 M&A?

This recent article from “Mergers & Acquisitions” says that small deals outperformed the overall M&A market in 2022 and are poised to do so again next year. This excerpt explains some of the reasons for that:

M&A for small companies worth between $100 million and 500 million increased by 27 percent in 2022 compared to pre-pandemic levels (2015-2019), according to data published by EY. That’s a noteworthy trend in a year that has seen anemic deal flow.

The EY team believes this trend is sustainable. “We expect to continue to see this strong flow of smaller deals throughout 2023, as CEOs remain cautious as a result of ongoing geopolitical tensions and heightened uncertainty,” says Andrea Guerzoni, EY’s global vice chair of strategy and transactions. “Deal financing challenges on the back of higher interest rates, increased costs of financing, and regulatory scrutiny will also make smaller deals more attractive.”

Tech CEOs are particularly keen on small deals heading into 2023. A recent EY report found that 72 percent of tech CEOs plan to pursue M&A in the next 12 months, compared to an average of 59 percent across all sectors. A significant correction in tech valuations could be the reason for this. CEOs with ample liquidity and cash could use this correction to consolidate their position in the market.

Another reason that smaller deals may continue to prosper that the article doesn’t touch on is that under current market and financing conditions, PE buyers have shown a preference for smaller “bolt-on” deals for their existing portfolio companies rather than large platform acquisitions.

John Jenkins