News & Resources
We are excited to present the latest edition of our Northwest Market Update. The first quarter of 2023 produced lower levels of M&A activity due to economic volatility and uncertainty. Conversely, transaction values have risen or stayed close to the same over the past year. This quarterly report features data and insights on transaction counts and trends in the NW region and an insightful M&A advisory piece from our Strategic Advisor Stephen Humphreys.
The first quarter of 2023 produced lower levels of M&A activity due to economic volatility and uncertainty. While most expected a return to pre-pandemic normalcy after the recent M&A boom, Q1 2023 M&A deal volume fell below pre-pandemic levels.
Turbulence in the banking sector which started in the US and spread to Europe impacted financial markets and halted or postponed some deals. In addition, general fears from rising interest rates, high inflation, and recessionary trends led to declining deal volume. In Q1 2023, Pitchbook reported 160 lower middle market deals in the Northwest, down 35% from the same period last year and down 17% from Q4 2022. Deal volume in the Northwest and in the US market at large has been steadily declining since Q4 of 2021.
Conversely, transaction values have risen or stayed close to the same over the past year. Q1 2023 represented a significant rise in median deal value, from $63.10 million in Q4 2022 to $125.00 million in Q1 2023. However, this number is skewed higher from a few larger transactions in the Seattle area in the technology and SaaS industries. This data point shows that while the M&A market has slowed considerably, even in the lower middle market sector, buyers are still willing to pay for high-performing businesses with positive growth prospects in desirable industries.
Although M&A activity in the first quarter of the year did not meet expectations, lower deal volume can be partially attributed to sellers who decided to postpone a transaction in favor of waiting for a better economic environment. However, both financial and strategic buyers still retain significant cash reserves intended for acquisition and are ready to secure financing when the right business comes to market. In the Northwest, 65% of deals were completed by financial buyers and 35% by strategic buyers for the first quarter of 2023, showing that companies are increasingly being acquired by financial firms. Private equity is an alternative investment to the public markets and can provide healthy returns to investors when the stock market does not. As a result, private equity firms are flush with capital to deploy and deals are getting done, albeit at a slower pace.
While sellers may have been disappointed by declining deal values in recent quarters compared to 2021, it is important to look at greater trends and recognize that 2021 was an outlier year for M&A, and many businesses were over-valued during the period. A return to more intrinsic methods of valuation based on consistent, historical growth may provide a better outlook for both buyers and sellers and continue to boost deal volume through the remaining quarters of this year. At Alexander Hutton, we continue to provide many options in terms of buyers, transaction structure, and deal terms for sellers who run high-performing, lower middle market businesses in the Northwest and industries we serve.