Regional and global markets for mergers and acquisitions have seen swings over the past four years. A report released in February by global management consulting firm McKinsey & Company characterized it as “a wild ride,” with a pandemic-fueled decline in 2020 and 2021, a recovery in 2022, followed by a “steep decline” in 2023.

According to four Iowa-based experts polled by the Business Record, private equity for M&As is available, but the market remains challenging. Companies are finding more “creative” ways to finance acquisitions with less debt. Some aging business owners are still hesitant to sell, but dealmakers are seeing activity in sectors like health care and manufacturing – companies with business lines that can add value, they said. 

Uncertainty surrounding what the Federal Reserve will do with interest rates this year and the U.S. political climate is partially driving M&A activity. 

To explain how M&A activity in Iowa and abroad may play out for the remainder of 2024, the Business Record reached out to:

Tom Cavanagh, vice president, BCC Advisers
JD Geneser, managing director, UHY Advisors Inc.
Christopher Sackett, managing partners/attorney, BrownWinick Law 
Brett Peterson, vice president, NCP Inc.

Here’s what they had to say: 

Editor’s note: The following emailed Q&A was lightly edited for clarity.

What are the top trends you’re observing with mergers and acquisitions in Iowa, nationally and globally in 2024?

Cavanagh: Buyers are looking back at the challenges they’ve faced over the past three years and are seeking acquisitions as a way to mitigate some of their risk exposure or enhance their capabilities to make them more valuable to their customers. They are seeking those transformational deals more than simply seeking growth, which was more the norm in 2021.

Valuations have come down a bit from highs in 2021, in part due to higher interest rates and in part due to a slower economy. Those valuations are still very healthy and in line with or slightly above pre-COVID levels, but it has taken some time for business owners to reset their eye levels, which buyers had already done. We’re getting there and as buyer and seller valuation expectations align, you’ll see more and more M&A activity.

We have seen a decline in the amount of leverage utilized in transactions over the past year and a half due to the increased rates and scrutiny. This is particularly true in the larger transactions which lean into a heavier debt structure.

M&A activity took a step back over the past 18 months, but the fact remains that there is an aging population of business owners and lengthening, although not by choice necessarily, hold periods for private equity firms with portfolio companies they need to divest in order to close out their funds and raise new ones. The limited activity can only last so long, and eventually, we’re going to see an influx of sellers. The capital and the buyers are already there, and they’re becoming increasingly more aggressive after a tepid 2023.

From a global perspective, we recently attended our international M&A association’s annual conference in Thailand where we heard firsthand from colleagues around the world. While M&A activity in Asia has been slower than usual, the European market was doing better than last year, further demonstrating that it is largely regionalized, although the global economy certainly factors into it overall.

If you look at the M&A environment in Iowa specifically, we’ve seen an increase of a bit over 10% in deal count in the first half of 2024 when compared to 2023. That’s meaningful but given how soft the M&A environment was in 2023, we would have liked to see this be a bit more robust. We would anticipate the second half of 2024 to exceed those growth figures in deal count, despite a relatively strong Q4 2023.

Geneser: In the first half of 2024, we have seen an uptick in the volume of mergers and acquisitions compared to the same period in 2023. Interest rates remain high, which impacts the ability of buyers to leverage transactions. As a result, this has continued to put pressure on valuations. Additionally, the due diligence process has become lengthier and more rigorous.

Peterson: We’re seeing a return to “pre-pandemic normal” for both asset pricing and trade volumes as labor and supply chains stabilize. Many businesses saw a major uptick in volume and/or margins as a result of having product/service availability during the pandemic, but only the companies presenting sustainable “goodwill”/value outside of having availability are maintaining volume and margin. We’re seeing businesses attempt to sell coming off these highs, but buyers are digging into the business model in-depth, and are pricing accordingly.

Sackett: We work primarily in middle-market M&A transactions. In that space, deal volume is up from the dark days of 2023. This is especially true for certain sectors such as business services, distribution, healthcare, manufacturing and specialized technology companies. AI-based companies hold promise, but for most, it is too early to exit. While deal volume is up, valuations are generally down, except for the best-performing companies. These trends tend to be relatively consistent across the Midwest, which is our main focus.  

Is the economic environment favorable today for companies considering M&A? How are the current financial markets affecting companies’ behaviors regarding growth by acquisition?

Cavanagh: It’s getting there. Going into 2023, buyers were reluctant to buy into a recession, and so we saw many buyers primarily sitting on the sidelines. M&A activity was down around 15% in 2023 from 2022, and closer to 30% from the peak activity in 2021. Nationally, there was a bump at the end of 2023, but it then cooled back off through the first half of 2024. We’re cautiously optimistic about the overall economy and M&A activity going forward into the second half of 2024 and 2025, but it is likely to be a more gradual increase than a sudden shift.

Geneser: We are experiencing a significant level of uncertainty on a global scale and the upcoming U.S. election adds to that uncertainty. Despite this, there is some optimism with regard to interest rates coming down, which would further improve market conditions. The current market provides an opportunity for companies to grow through acquisitions while taking advantage of lower valuations.

Peterson: Yes – today’s interest rate environment and valuation framework are in line with historical norms, with the addition of the money supply created during the pandemic still waiting to be deployed; capital availability is still high thanks to larger corporate balance sheets and private equity capital commitments that have accumulated over the past four years. While there are soft spots in the broader economy (specific industries, including agriculture, come to mind), there’s continued resilience overall, albeit with “future uncertainty” garnering extra attention in 23 2023 and 2024.

Companies seeking growth via acquisition are better off from a valuation perspective today relative to the peak in late 2020 – early 2022, but for buyers to realize synergies post-closing, hold onto the talent pool and successfully integrate acquisitions, they still need to be able to effectively price and structure transactions. Buyers should remain selective on the size and scope of transactions they’re focused on as the wrong deals (i.e. too small/too large, lack of leadership and/or talent flight risk, unclear synergies, etc.) can destroy significant company value. For sellers, there is enough dry powder within the various investors and buyer pools, that even in distressed situations, we’re finding that most companies have viable paths within M&A.

Sackett: Market conditions remain challenging, but they are improving. Interest rates have stabilized, and companies have become accustomed to dealing with higher rates while holding out hope for cuts. Economic and political uncertainty are rarely good for M&A, and that remains true in 2024. However, with performance off in many industries, organic growth is difficult, so companies looking for material growth are looking at acquisition opportunities and finding creative ways to finance deals with less debt (e.g., earnouts, seller financing, and/or rollover equity, staged transactions, non-bank financing, etc.). Also, there is lots of available capital (dry powder) for deals – but it is chasing fewer deals due to some of the challenges mentioned.

What market factors might prohibit or caution companies from pursuing a merger or acquisition right now? What makes it attractive?

Cavanagh: Interest rates have remained high, despite many anticipating cuts this summer. These increased rates have made financing acquisitions more expensive, which can deter potential acquirers, particularly if the target doesn’t check all of the boxes. Companies may adopt a wait-and-see approach, hoping for more favorable borrowing conditions before committing to significant investments. The election provides additional uncertainty into the market, potentially affecting regulatory and economic policies. While companies may be cautious about pursuing M&A activities until there is more clarity on the political landscape, we have found that M&A activity does not strongly correlate with which party wins, suggesting it is more of a talking point than an actual deciding factor for buyers and sellers.

Geneser: It continues to be somewhat of a buyer’s market. Buyers finance the vast majority of their acquisitions. Borrowing remains more expensive, which impacts the amount a buyer is willing to pay.

Peterson: Interest rate uncertainty, especially for companies within interest rate-sensitive sectors (i.e. real estate). Because the go-go years were not too long ago, owners are hesitant to sell and experience FOMO (fear of missing out)  if the Fed cuts and activity ramps up. Conversely, buyers are attempting to price assets in these sectors as if the Fed stays put on further rate cuts, which could mean further declines in company profitability and valuations. Additionally, in businesses that see long-term demand growth (e.g. infrastructure spending and healthcare), the war for talent remains competitive. Outside of M&A, it’s challenging to recruit and retain talented people at a pace that supports consistent growth.

Sackett: Strong year-over-year growth with strong profit margins are generally the key to a successful transaction. With some of the current headwinds, some industries are finding it difficult to have that kind of growth and profit. On the sell side, that makes it harder for owners to get the valuation they want. On the buy-side, it may lead to some bargains if sellers are ready to sell, and the near-term challenges don’t diminish or limit the longer-term upside.

What sector(s) are more likely to consider an M&A route? Where is the most activity occurring?

Cavanagh: There is a strong focus currently on sectors with recurring revenue models, transformative potential, and economic resilience. Recurring revenue models might include SaaS (Software-as-a-Service) businesses, but it could also include those with routine maintenance schedules such as lawn care or managed IT services. Transformational acquisitions are going to enhance the competitive position and might include adding technological solutions or entering new geographic markets a buyer might otherwise struggle to penetrate.

Geneser: Our recent activity has been concentrated in the technology, health care, healthtech, and biotech industries. While we have had manufacturing and distribution deals as well, we have seen a little less activity in those sectors.

Peterson: Primarily businesses with end markets tied to defensible industries today (e.g. industrials, (most) niche manufacturing, infrastructure, health care, etc.). Infrastructure has a $1 trillion-plus public sector enhancement with a long-term outlook, niche manufacturing and industrials are relying on the replacement cycle normalizing from COVID and in many cases still catching up to the next 10-20 years of activity (not to mention the on-shoring wave occurring in global trade), and health care spending likely isn’t going anywhere in this (and other) aging developed economies.

Sackett: As noted above, business services, distribution, health care, manufacturing and specialized technology companies are all pretty active at this point in 2024. With that said, often the attractiveness of M&A is sometimes driven by factors other than industry. For example, in the Midwest, we have a lot of aging business owners who don’t have the luxury of timing the market. There are always companies ready to sell and buyers willing to buy – and that is not always sector-dependent.

The private equity market pulled back from M&As in 2023, according to an analysis from McKinsey and Company. Is that money returning to the M&A market and how is it being spent?

Cavanagh: Yes, in 2023 there was a general hesitation with the looming fear of a recession, which made PE funds reluctant to commit capital to new acquisitions. Investors were wary of the economic downturn and its potential impact on portfolio companies, opting to adopt a more cautious approach. As the economic outlook begins to improve in 2024, PE funds are cautiously re-entering the M&A market. The focus is on high-quality companies that can perform even in uncertain economic conditions. They’re looking for businesses with strong fundamentals and recurring revenue streams. We’re seeing more PE funds that are creating specific thesis around a few industries and targeting those, while be more hesitant to pursue businesses that fit outside of that focus. It’s not yet back to pre-2023 levels, but we are seeing PE firms increasing their pace and expect that to accelerate further going forward.

Geneser: Deal volumes have increased compared to 2023. Private equity firms are focusing on accretive acquisitions to enhance their existing portfolio companies.

Peterson: The money never left. While deal volume was down in 2023, it wasn’t for lack of trying – the lag in 2023, due primarily to uncertainty in the broader macroeconomic economy and rising interest rate environment, required time to adapt to the new expectations for both buyers and sellers (who always start with a bid-ask spread to overcome). Private equity commitments (or “dry powder”, which according to some estimates remains near all-time highs approaching $2 trillion) remain and need to be put to work or given back to investors. This creates a strong incentive to deploy capital, which will prop up private equity investing for the coming two to four years.

The private equity industry has grown up in the last 40 years and will continue to take more share of the “transaction pie” (versus publicly traded companies and other types of buyers) as they have built-in incentives (or an existential threat) to transact, otherwise, they lose their track record, capital and businesses. In 2024 we have seen, and expect to continue seeing in the next 12 months, continued pushes by private equity to secure both platform and bolt-on investments to their existing portfolio companies.

Sackett: Private equity money is definitely out there and the appetite for the “best” deals remains strong. Many private equity buyers are focusing on add-on investments for existing portfolio companies, where synergies are stronger and the high cost of debt is less of an issue. One trend with P/E buyers is requiring sellers to rollover a higher percentage of the transaction proceeds than before – likely due to the high cost of capital.

How do the number and value of M&A deals in Iowa in 2024 compare to 2023?

Cavanagh: If you look at the M&A environment in Iowa specifically, we’ve seen an increase of approximately 11% in deal count in the first half of 2024 when compared to 2023. That’s meaningful but given how soft the M&A environment was in 2023, we would have liked to see this be a bit more robust. We would anticipate the 2nd half of 2024 to exceed those growth figures in deal count, despite a relatively strong Q4 2023. A softening ag economy could provide headwinds though for certain sectors.

Geneser: We advise companies and private equity firms on the buy-side and sell-side nationally. We have seen an increase in Iowa, and nationally, with strategic add-on acquisitions versus private equity. Companies are taking advantage of lower valuations to acquire a competitor or to bring in vertical integration.

Peterson: We are seeing more overall activity in 2024 and expect the figures to indicate as much. However, this is far from the craze that took place in late 2020 through early 2022 – buyers are digging in during diligence further and extracting economics when they are able (especially in later stages of the transaction process), which creates more execution risk and drags out deal timelines longer. The dollar value of successful transactions we’ve seen in the Midwest is also higher than it has been over the past few years; scale businesses that weathered both the pandemic and high interest rate environment are now selling, and while multiples aren’t at their peak any longer, these businesses can and should still expect to command premium valuations based on their size and quality.

Sackett: Our firm’s Iowa-based deal volume is up for Q1 through Q2 when compared to the low volume of 2023. It’s not up to the frothy levels of only a couple of years ago, but up materially. Signs seem to point to a continued increase in deal volume for our firm and our clients.

What else should the Business Record audience know about the health of the M&A market?

Geneser: There remains a significant amount of capital waiting to be deployed in the market. Buyers are actively seeking acquisitions and transactions are closing.

Peterson: M&A will continue and likely increase in the coming years for a number of reasons. First, aging business owners need succession plans, and traditional M&A offers an attractive liquidity event and a built-in talent pool to take the reins. Second, traditional private equity buyers have a shelf life, meaning they have a three-to-five-year period to close additional transactions, and even if family-owned businesses don’t transact at higher volumes, other types of owners like ESOPs, family offices, and the like generally are always more open to transacting. Finally, without a legislative change, the 2017 tax changes are set to expire at the end of 2025, which has already significantly increased the estate planning being conducted, which likely springs additional sellers into the market. If there aren’t changes to lifetime exemption that sunsets in 2025, we’re expecting many private company sellers to get off the sidelines in later 2024 and 2025. For sellers in the middle market, their after-tax proceeds will be reduced by millions if they choose to wait until 2026.

All of this considered, cracks are continuing to form in various pockets of the economy (think consumer spending and agriculture) coupled with a generally anti-M&A Federal Trade Commission, seemingly endless federal deficits and election uncertainty, there may be hesitation by companies to transact. For larger transactions, HSR and anti-trust scrutiny has been a significant issue (primarily focused on cross-border and technology/‘magnificent 7’ transactions involving larger, publicly traded companies).

Sackett: The M&A market will always ebb and flow. With that said, good companies will always find buyers, and savvy buyers will always find opportunities. And, their deal teams will be there to get the deals closed.