Back to School: M&A down in 2017 but still strong on historical basis: PitchBook

Sponsor-backed M&A accounted for 29.8 percent of the 10,465 deals in 2017, the highest proportion since 2007 (30.3 percent), PitchBook reports.

In terms of deal value (31.3 percent), private equity M&A was significantly short of the pre-crisis mark (41.8 percent), but higher than it has been since 2013. Pitchbook analyst Dylan Cox said the number of transactions was the more meaningful figure, being less volatile.

The aggregate value of mergers and acquisitions in North America was $1.8 trillion last year, encompassing 10,465 transactions, Pitchbook said.

Those figures were down from 2016 by 16 percent and 16.1 percent, respectively, despite positive economic indicators in the U.S. But “2016 was sort of an all-time year,” which “set a record in terms of deal value and activity across a lot of different geographies and sectors,” Cox noted.

More significant than the year-over-year slowdown is that 2017 continued a historical run of robust dealmaking: Total M&A value in North America and Europe was $2.93 trillion, the fourth consecutive year of at least $2.9 trillion in transactions.

Deal flow is being driven by cash-rich corporate balance sheets and heaps of dry powder, against a backdrop of economic optimism and easy financing. Tax reform and an influx of overseas earnings are expected to push M&A activity higher, which means more upward pressure on already lofty price multiples.

“The median valuation/EBITDA multiple for North American M&A transactions reached 10.3x in 2017, up slightly from the 10.2x recorded in 2016,” PitchBook reports. That represents an all-time high.

The effect of competition is also reflected in the median deal size, which rose by a third for North America and Europe to $40 million. “As these firms raise larger funds, [they] almost by necessity have to target larger companies, larger deals,” Cox explained, “to deploy that equity across a similar number of transactions.” The result has been a move toward the upper-middle market. Bigger acquisitions are facilitated by accessible credit, and contribute to elevated prices, since “larger, faster growing companies tend to trade at higher multiples.”

While PE firms face pressure “to complete deals no matter the prevailing price environment, strategic acquirers have been able to be more cautious,” Cox said. Taking advantage of their longer time horizons, some strategics have pulled back as they focus on consolidating existing acquisitions.

Technology M&A hit a record 17.8 percent of deals in 2017. The sector’s popularity is attributed to “non-tech incumbents” looking to address potentially disruptive competition. Target companies are increasingly backed by private equity or venture capital.

Action Item: Read PitchBook’s 2017 Annual M&A Report here.

Photo courtesy BrianA.Jackson/iStock/Getty Images