Dive Brief:

• Mergers and acquisitions slumped worldwide during the first quarter as sharp price discounts by sellers failed to offset headwinds from high inflation, rising interest rates, a tight labor market and banking system stress, PitchBook said.
• Deal value during the first three months of 2023 fell to $993 billion, retracing a modest gain during the fourth quarter and lagging by 32.2% the record total during the fourth quarter of 2021, PitchBook said.
• “The harsh macroeconomic backdrop that drove the decline in 2022 persisted in the new year, joined by a near crisis in banking,” Tim Clarke, PitchBook’s lead private equity analyst, said in a report. Still, “heavily discounted prices” helped ensure deal value during the quarter did not fall far below $1 trillion.

Dive Insight:

Deal-makers have seen the M&A landscape grow especially dim in recent months. The failure of Silicon Valley Bank and other lenders since March will likely intensify a broad pullback in lending that started last year, according to economists and Federal Reserve officials.

Indeed, banks expect to tighten credit standards for all types of loans during the rest of 2023, the Fed said this month.

When explaining plans to pull back credit, “banks most frequently cited an expected deterioration in the credit quality of their loan portfolios and in customers' collateral values, a reduction in risk tolerance, and concerns about bank funding costs, bank liquidity position and deposit outflows,” the Fed said in a report on its quarterly Senior Loan Officer Opinion Survey.

Rising interest rates and tighter credit have especially jolted small companies, prompting many founder-owned businesses to seize on buyers’ offers, PitchBook said.

During the first quarter, founder-owned businesses were the leading players in deals below $100 million, accounting for a record 85.3% of sellers in M&A transactions, according to PitchBook.

After discounting their prices, sellers in transactions below $100 million offered a median enterprise value to revenue multiple of 1.1x during the first quarter — based on data from the previous 12 months — compared with a 1.6x multiple for overall global M&A, Clarke said.

Private equity firms have balked at selling portfolio companies at lower prices, continuing a trend in 2022 when their M&A transactions in the U.S. shrunk 25.2%, Clarke said.