The U.S. economy showed resilience in 2022 but this is a challenging time. At the beginning of the year, consumers with liquid resources and good jobs as well as businesses with adequate funding, provided a base for strong 2022 economic activity. However, 2022 also saw a Russian invasion of Ukraine, disruptions in the global energy markets, continued supply chain problems and big declines in the public equity markets all of which sapped the base strength of the economy. In addition, high inflation and the Fed’s inflation fighting interest rate increases have further eroded consumer and business owner sentiment. While consumer sentiment improved a little in January 2023, it remains well below the post pandemic high recorded in 2021. The business malaise continues as well. The NFIB Small Business Optimism Index declined in December, marking the 12th straight month of below average index performance. So, what does that suggest for 2023? In the January 10, 2023 report, the Conference Board Economic Forecast stated “… economic weakness will intensify and spread more widely throughout the U.S. economy over the coming months, leading to a recession starting in early 2023. The outlook is associated with persistent inflation and the Federal Reserve becoming more hawkish. We forecast that real GDP growth will be 2.0 percent in year-over-year in 2022, slow to 0.2 percent in 2023, and then rebound to 1.7 percent in 2024.” Specifically, the Conference Board is calling for negative quarterly GDP growth in the first 3 quarters of 2023 and returning to growth late in 2023. Clearly this next calendar year will be interesting for the economy and the deal business.
M&A market activity, both in number of transactions and in dollar value, steadily declined during 2022. While comparisons to the record M&A volumes of 2021 is unfair, 2022 will likely produce deal activity far below the levels achieved in 2021 and more on par with the pandemic shutdown year of 2020. The rapid emergence of inflation and the delayed recognition of the depth and breadth of the problem has negatively impacted the economy and M&A. Inflation is an insidious economic problem that has not been seen for decades. Both monetary and fiscal policy errors contributed to the inflation problem and will make eradicating inflation a more protracted exercise.
Even with these negative issues, there is still room for optimism in the M&A market. The market is almost always receptive to quality deals. However, we believe the broad based “sellers’ market” experienced before, and shortly after the pandemic has reached an end. The market has bifurcated with well-prepared, relatively strong companies commanding broad buyer interest, but lesser quality sellers seeing less interest and lower valuations. We have now entered a “flight to quality market” where buyers are attracted to the best companies. Sellers with strong businesses and good operating performance should still see broad buyer interest.
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