After peaking in 2021, mergers and acquisitions activity has cooled off in Oregon. That’s the verdict of three Portland M&A attorneys.
“It’s not horrendous,” said Brendan Gutierrez McDonnell, an M&A attorney and partner at K&L Gates. “Activity is out there but not as robust as it was a few years ago. The pace before was records across the board. We are in a moderate market when it comes to M&A activity, but it’s steady as she goes.”
In the first half of 2023 in PwC’s Americas region, deal volumes were 3% lower than in the first half of 2022 and values were 36% lower, according to the accounting giant’s mid-year update.
“Deals, depending how you measure them, are down substantially from how they were,” said Jason Brauser, a partner at Stoel Rives in Portland. “Deal volumes were down in 2022 and, more strikingly, the overall value of deals came down. There are a lot less deals getting done this year, in particular, but also last year.”
Smaller middle-market deals, in the $50 million to $200 million range, are still getting inked, and the most active industries are natural resources, energy and timber, he said. This year, he’s had four transactions close, including those involving a large rental equipment company and two water companies.
The factors tamping down M&A activity include inflation, higher interest rates and the conflicts in Ukraine and Israel, not to mention the uncertain political climate in the U.S. The prime rate jumped from a historic low of 3.25% in March 2022 to 8.5% today, impacting how buyers view valuations.
Tom Tongue, an M&A attorney and shareholder at Schwabe Williamson & Wyatt, said he saw a few deals unravel late in the game, a sign that “the economy shifted quickly on people.”
“Inflation caught everyone flat-footed,” he said. “We certainly got deals done, but sellers didn’t always get the same sweetheart valuations and terms they got in the frothier times.”
Brauser said deals are taking longer now compared to a couple of years ago.
“Buyers are taking their time with due diligence,” he said. “Buyers are more willing to walk away.”
According to S&P Global Market Intelligence, there is $2.5 trillion in “dry powder,” or cash on companies’ balance sheets out there. A big chunk is held by private equity firms.
“The challenge you have, particularly with PE firms, is they rely on debt financing to get their transactions done, and because of inflation and its impact on interest rates going up, it’s gotten more expensive to finance those transactions and lenders are also being pickier,” Brauser said.
Buyers want “good targets, where there’s a solid value proposition, and it makes it easier to sell to the financing sources.”
That’s a little less of an issue for non-PE strategic investors, who are not as reliant on debt as part of their return, Brauser said.
As debt facilities come up for refinancing in a higher interest rate environment, companies are looking at taking on more debt expense.
“Rather than carry the extra expense, companies are being more careful to look at their assets and saying are these productive assets or would we be better off selling them?” Brauser said.
He’s seen distressed asset deals this year and is working on one now in which a client is considering buying assets out of bankruptcy.
As the market comes off a period when sellers were getting high valuations of eight-to-10 times earnings before interest and taxes for their companies, the typical deal is receding back to 5-6X.
“It takes sellers awhile to adapt to that,” Brauser said. “I have an expectation that buyers and sellers will have more of a meeting of the minds.”
Sectors that could be hot next year include infrastructure, health care, construction materials and manufacturing, Tongue said.
But a few factors might also dampen activity, especially in the first half of the year, including the presidential election and concerns over another round of supply chain disruptions.
“Every client I talk to is worried, directly or indirectly, about what a supply chain disruption with China would look like,” Tongue said.
Closer to home, Oregon companies also bear the weight of negative perceptions on the part of buyers from out of state.
“What they see in the news isn’t really reflective of this great community we have,” Tongue said. “We have to take care of some things to keep people interested in buying companies here.”
Read the full article in the Portland Business Journal.
This article was republished with permission from the Puget Sound Business Journal.
This article summarizes aspects of the law and does not constitute legal advice. For legal advice for your situation, you should contact an attorney.
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