Bain & Company forecasts an upswing in M&A transactions, driven by a backlog of assets that will fuel dealmaking activity as the year unfolds. Hunt Scanlon Ventures managing director, Cody Crook, unpacks what it all means for human capital M&A dealmaking.
The M&A market has always operated in a boom/bust cycle of expansion and contraction. And the last couple of years have been no exception. According to Bain & Company’s latest Global M&A Report, rising interest rates among other factors represented a significant obstacle for dealmakers.
But the biggest hurdle according to the consultancy was the valuation gap between what buyers wanted to spend and what sellers wanted to charge for their companies. That rift kept many would-be deals from happening.
The result: strategic M&A declined by six percent and strategic deal multiples were the lowest seen in a decade. Even so, many longtime frequent acquirers used this period as an opportunity to expand their competitive advantage through M&A.
Whether or not operators were able to get deals done, everyone is ready for some respite from the challenging environment. As the Fed prepares to change monetary policy, Bain predicts that many of the assets that didn’t come to market in the down year of 2023 will fuel active dealmaking in 2024.
The ‘Big Backlog’
Bain has dubbed this asset pileup the ‘big backlog.’ Many of these will be bought by strategics; others will be rolled into other financial sponsor portfolios. As part of this market shift, according to Bain, corporates will sell assets that no longer fit with their strategy, and private equity will sell aging portfolio companies.
As a result, we can expect more scale deals for consolidation before seeing a return to scope-oriented capability investing to drive growth, according to the Bain analysis. And as competition intensifies, conviction and speed will be what it takes to win deals and make them succeed.
Cody Crook, managing director of Hunt Scanlon Ventures and head of the firm’s investment strategy group, unpacks more of the report’s findings and examines the impact on human capital M&A dealmaking.
Cody, what are your takeaways from Bain’s just-released M&A analysis?
I was fascinated by Bain’s research on firms that maintained an acquisitive stance even during the market slowdown of the past couple of years. Since 2020, we have we been advising both our buy-side and sell-side clients to maintain an offensive posture to dealmaking. Waiting for market corrections and timing deals in our mind is defensive posturing. The way frequent acquirers outperformed their competition in recent times is a resounding validation of that approach.
“Our first-hand experience is that operators who maintained an acquisitive approach and kept conversations around dealmaking alive during the downturn now have a distinct advantage.”
What did you make of Bain’s valuation gap conclusion?
It surprised me. I found it interesting that Bain presents the valuation gap – the chasm between what buyers wanted to spend and what sellers wanted to charge for their companies – as the largest hurdle that kept many would-be deals from happening. Deals, of course, were delayed for other reasons, including high interest rates, mixed macroeconomic signals, regulatory scrutiny, and geopolitical risks, as Bain notes. But their conclusion is that the leading obstacle to deal-closings wasn’t any of these, but it was price. That will create an unusual demand curve.
What are you seeing vis-à-vis valuation models in the human capital M&A deals your firm handles?
According to Pitchbook, valuations are set to improve this year. Our team at HSV has already negotiated improved multiples on two deals we’re in the middle of closing this year. The median EV/EBITDA multiple for M&A transactions announced or closed in 2023 was 9.3x, a noted improvement from 2022. We’re not seeing those levels in the human capital space, but we are seeing higher multiples being offered on truly superior assets coming to market. If Pitchbook is correct and the trend continues, we’re going to see the No. 1 barrier to deals getting done diminish significantly. That is very good news for the buyers and sellers that we serve and the broader market as well.
“Nothing drives dealmaking like the need to get deals done.”
Do operators who’ve kept an acquisitive stance during the downturn now have an edge over their rivals?
In the months ahead, Bain and other advisory firms are forecasting a rapidly improving macroeconomic environment for dealmaking. The companies that maintained an acquisitive approach during the market slowdown are certainly much better prepared for the time when markets improve. As the Bain Report noted, M&A competition is set to intensify this year. Conviction and speed will be necessary to win deals, as Bain points out in its analysis, but we also believe that efficiency will come into play to integrate acquisitions quickly to make them succeed. Our first-hand experience is that operators who maintained an acquisitive approach and kept conversations around dealmaking alive during the downturn now have a distinct advantage.
Cody, are we at an M&A inflection point as we head into the final weeks of Q1?
Emphatically, yes. Bain’s commentary on the ‘big backlog’ suggests that when the market turns, it will turn up quickly. We all have focused for some time now on dry powder and pent-up demand. And we all have talked ad nauseum about macroeconomic conditions, and for good reason. The last few years demanded that focus. But nothing drives dealmaking like the need to get deals done. If the assets-ready-to-trade backlog is as large as Bain says it is, then it won’t take a massive macroeconomic change to see deal flow come alive. Corporates are looking to sell assets that no longer fit with their strategy, and private equity will look to sell aging portfolio companies as soon as the light flashes from yellow to green. These deals are overdue, and operators will want to get them done quickly.
Article By
Cody Crook
Cody Crook is managing director and head of investment strategy at Hunt Scanlon Ventures - an M&A advisory firm that specializes in the human capital space. Cody is responsible for co-managing the firm's investment portfolio, which includes executive search, talent acquisition, private equity, and investment firms. Leading the investment team, he spearheads all fund transactions and maintains portfolio developments. He is also responsible for sourcing, managing and monitoring investments and working with external portfolio managers, analysts and investors on active and prospective transactions. Connect with Cody.
