Global M&A activity is ramping up

Activity levels in M&A (mergers & acquisitions) are increasing after a subdued period since mid-2022. M&A appetite over the last 18 months was impacted by an uncertain economic and geopolitical outlook, rising interest rates to combat inflation and a decline in public stock market valuations until the tail end of 2023. These factors contributed to a valuation gap between buyers and sellers, hindering agreement on sizeable M&A deals. However, a global M&A recovery has started in 2024, driven by:

● More optimistic economic outlook, supported by normalised inflation and stabilised central bank interest rates

● Stronger stock market valuations at the start of 2024 and record cash balances for publicly listed corporates

● Significant availability of debt financing, supporting leveraged buyouts (LBOs) by private equity (PE) firms

● Narrowing the valuation gap between buyers and sellers, borne by more realistic valuation expectations from sellers

●Potential risk of capital gains tax increases for founders after upcoming elections in several European countries

● Substantial pipeline of sale processes mandated to advisors (investment banks), targeting completion in 2024

The US economy has recently outperformed Europe, helping to drive an uptick of new M&A mandates from potential sellers in Autumn 2023. Europe is now experiencing an increase in new mandates. We saw a similar dynamic during previous M&A upcycles, where increasing European M&A activity lags the US by 3 to 6 months.

Spotlight on the middle-market

We define middle-market M&A at Baird as deals with an enterprise value of between €100 million and €2 billion. The majority of acquirers in the mid-market are corporates, often publicly listed on a stock exchange, and private equity firms that acquire companies to sell them for a materially higher value after a few years of ownership.

In the mid-market, founders and management teams have shown a preference to keep their businesses privately held for longer, often partnering with private equity. As such, the number of publicly listed companies in North America and Europe has decreased over the last 15 years, while the number of PE portfolio companies has grown significantly. Since 2009, the number of private equity firms globally has more than doubled to over 8,000 today, according to Preqin.

Given the muted levels of M&A over the last 18 months, PE firms are now under pressure from their investors (LPs, limited partners) to return capital by exiting (selling) a number of their portfolio companies, some of which they have owned for over 5 years. This is expected to expand M&A supply in the mid-market in 2024, primarily for quality assets.

A closer look at the medical technology (MedTech) sector

Pre-Covid, publicly traded MedTech companies saw consistent expansion in valuation multiples driven by strong growth and profitability as well as the perception of being a defensive sector with secular demand drivers (e.g. aging population, rising incidence of chronic diseases, etc.). The outperformance of MedTech stocks relative to broader leading indices (e.g. S&P500) continued during the Covid pandemic as investors were undeterred by short-term challenges such as the deferral of elective procedures.

More recently, sector-specific factors have contributed to a sell-off in MedTech stocks and consequently reduced M&A appetite. Two such factors are i) inventory destocking on the back of prior widescale supply chain disruption and ii) GLP-1, a weight loss drug that potentially reduces demand for certain medical devices and procedures. However, we expect increased M&A appetite in MedTech from both corporate and private equity acquirers in 2024 driven by:

● Moderation of GLP-1 concerns

●Normalisation of inventory levels and production/sales cycles, aiding manufacturers and subsequently distributors

● Strength of underlying demand, enabling high single-digit end market growth for much of the sector

● Attractive business models with high growth and margins, often supplemented by significant revenue visibility and recurrence through a strategy to provide not only devices but also consumables (and in some cases software)

● Focus on innovation, creating high barriers to entry and competitive differentiation for target companies

In today’s market, the role of an experienced M&A advisor to navigate sector-specific investment considerations, the global buyer universe and sale process dynamics is more important than ever.