Recent Macro Trends and Impacts on M&A Deal Flow

Recent Macro Trends and Impacts on M&A Deal Flow

Shoot The Moon
Shoot The Moon
Recent Macro Trends and Impacts on M&A Deal Flow

Listen to Shoot the Moon on Apple Podcasts or Spotify.


As we look forward to 2023, the team discusses important topics to pay attention to, including:

  • Deal-flow and M&A
  • Sell-side opportunities
  • Shifts in valuations in the marketplace
  • Summary of macroeconomic environment.


Matt Lockhart  00:04

Hello, this is Mike Harvath with this week Shoot the Moon podcast broadcasting live and direct from Revenue Rocket world headquarters here in Bloomington, Minnesota. Thanks for tuning in. And mighty start with a hearty Happy New Year. It is 2023 We’re in the heart of the cold winter here in Minnesota. But that doesn’t mean that everything else is cold as it relates to IT services businesses mergers and acquisitions are related strategy. With me today is my partner’s Ryan Barnett and Matt Lockhart. Welcome, gentlemen.  Well, Happy New Year to you too, Mike. And, you know, we got through what it was like the I think the top 15 snowfall here in beautiful Minnesota. And, uh, you know, for our topic today, I think that’s a good lead in because it’s going I mean, we’re off to a great start in the new year and, and the snow is coming down. And man we’ve had, it’s already been busy.


Ryan Barnett  01:11

Thanks for having us here, Mike and Matt, it feels like a cold winter in some other places in the world. If you read the news this week, you’ll see things like Goldman Sachs laying off a swath of employees. And you’ll look at, you’ve got some macro economic trends that seem to be disparaging to deal flow. And Mike man wanted to talk to you this week and see, are those realistic? And are those something that impact our market today? So I’d love to have you just start off, Mike, we just saw that that layoff from Goldman, what’s it mean to the rest of the world?


Matt Lockhart  01:53

Well, you know, I think there’s a lot of reasons why the big banks are pulling back, particularly in their deal making teams. Certainly we’re not seeing the middle market, you know, firms, you know, hovering around 100 million or under certainly are, we’re not seeing anything like that. And we certainly don’t have it on Horizon. I would say that, you know, if you’re, if you’re a major bank, investment bank, you know, you’re you’re not taking companies public right now, markets been rather tumultuous. The whole stock market sort of caved in 22 or late 21 and early 22. And you know, fundraisings challenging because of the increased interest rate environment. So I think some of these guys are reducing their workflow, workforces more than they might normally. I think, when you look at some of these big banks, particularly New York based investment banks, they tend to do some of that, and people move around early in q1, because that’s generally when they get their bonus distribution. And it’s generally, frankly, a lever for the banks to negotiate complex moving into the coming year, sort of reduction and trimming and movement of other bankers kind of moving from one bank to the master roles and responsibilities. But, you know, to sum it up from our perspective, we think the markets still off into the right this year, certainly in the middle market, and not seeing any slowdowns. What do you see Matt? Well, I think that your point is spot on. Yeah, I mean, we talked about it even last year, where were some some dealflow m&a activity at the very high end. I mean, you’re talking built billion dollar deals. I think there has been some slowdown there. Right. And, and for for Goldman, I think it says much about the public markets and bringing people public and huge capital raises, and M let keep in mind Goldman does everything. They do everything across all sectors for for us being obviously, squarely rooted in tech enabled services, IT services, SAS firms, and squarely in the middle to upper middle market. We don’t see that slowdown. And if we say at once we’ll say it 100 times, it’s rooted in the fundamentals of supply and demand, right? And there’s just so much need for all of the services, all of the product capability in our sector, that is not going to slow down and to to win. You got to go faster than the competition and you got to be increasing your capabilities. You got to be increasing your talent pool and doing that solely organically is a is a real challenge. So it’s the first half of January here. And we’ve got people calling us who are telling us to get movin, right? Because they know that they want to move. So I think it’s super healthy. And I think it’s gonna be super exciting. I think it’s gonna be a super exciting year.


Ryan Barnett  05:24

I think you’re both both absolutely right. And part of what we’re seeing is that investors and often and oftentimes investors in downturns will toward turn towards cash, heavy and Cash Generation businesses. And the ITC versus marketplace, which has a lot of recurring revenue, a lot of revenue, that is often times would be difficult to replace, investors see that. So we’re seeing capital still being deployed, we see still cash on the sidelines that are looking to be deployed pristine strategic operators making plans for the year and putting that capital to work. And in investing, we’re also seeing people that are more willing to have discussions about selling firms. So I think there’s a macro economics that we’re seeing about an aging technology workforce, and a lot of companies that started in the 2000 2005 era that are going through cycles of, of growth, and then at some point, even looking to, to the future of what’s beyond today into potentially selling their business. So that cash is king to those investors, and I think they’ll they’ll will continue to see that throughout 2023.


Matt Lockhart  06:47

You know, Ryan, I think that’s a great point. On the selling side, I’ve got a little burgeoning theory that I’d love to the to throw out here and get your guys’s reaction to, I think that on the a bit on the middle market tech selling side, I think that coming out of the COVID era has something to do with that. And here’s what I mean by that. I mean in in COVID there it was like, okay, hey, you know, we’re we’re retrenching, right, we’re making improvements in our business, our business off in in many cases became more profitable because the the work from home virtual digital needs increased. So we had some increased profitability, we actually did really well, we had some, some good growth that were driven by some of these macro factors. And now, we’re in a great position, but to take it to the next level of scale, we see working with a larger firm or a partner as a better Avenue than going it alone. What do you guys think? Is they think I’m off my rocker? Do you think that kind of coming out of COVID has something to do with this, this sell side opportunity for middle market tech firms?


Mike Harvath  08:20

Well, I think, you know, I think it’s an interesting theory about, you know, I think that certainly bigger is better. And we’re continuing to see accelerated consolidation in the market. And certainly, that could be why, you know, I think there’s probably a ton of factors that are driving that. And there are certainly as a globalization component that has been applied here, you know, the world is shrinking a lot. And I think COVID Certainly accelerated that. And thus, the competition, the level of competition has gone up for a lot of our clients and a lot of the sort of middle market tech services firms and, you know, they get a little more thick ice, if you will, or fortification as they continue to scale and grow. And, and I think they certainly have the opportunity through economies of scale to optimize profitability. As they get bigger, they can apply more resources. I think it’s tougher than ever to compete, you know, as a firm who small and may not have enough of the types of resources needed to bring, you know, meaningful marketing and sales and ops functions to bear so, you know, I think some of what we’re seeing is that momentum of consolidation, you know, further amplified by the just, you know, sheer demand for technical resources, you know, just not enough people doing this kind of work. So, you know, I think firms want to be able to certainly been a growth imperative for a lot of our buyside clients is a we really need more smart you know, in Did the IRS and tax and consultants on our team to be able to, to be able to really service the needs we have, let alone continue to, you know, expand market share. And so I think there’s a confluence of all these things that have really driven that narrative and that initiative to consolidate, and I certainly don’t see consolidation slowing down. I think, you know, people have had a lot of success with doing deals and combining, and, you know, success sort of breeds success. So they’re going back to do more deals now and anxious to do multiple deals now. And I think we’re going to continue to see a pretty robust market for the foreseeable future.


Ryan Barnett  10:41

Mike, do you see any evaluation shifts in the marketplace? If we if we’ve got these macro trends that are, you know, interest rates going up and money harder to get? The logic would say that things may become become less expensive from a valuation or enterprise value sense. We’ve recently completed some deals and what are we seeing to support that theory? Or are we seeing things stay relatively high?


Matt Lockhart  11:15

Well, it’s fascinating, because you would think, you know, conventional wisdom would say, with interest rates going up, we’d have pressure on valuations, we certainly have not seen that. And anything we’ve seen sort of the, you know, theory of scarcity, driving valuations up, you know, we compare notes with a bunch of, of our peers in the market, and they’ve seen the same sort of trends continue. And so it’s not just us on valuations. And so, you know, I think the, the overarching sort of demand for talent, and the demand for bigger and more sophisticated firms is sort of outweighing or overshooting the logical, you know, downward pressure you get from the discount rates by increased interest rates. And so you’ve certainly not seen it in recent transactions and our own business, even though sunsetted would occur. If anything, we’re seeing sort of the opposite. And I think, you know, we’re gonna see a year probably we’re there continues to be a rising tide on valuations, if not, you know, maybe stasis for the first half of the year. And then my forecast is we’re gonna start to see him, you know, continue to go up. You know, I don’t know. I mean, we’re predicting the future is tough stuff. So it’s hard to predict. But we’re certainly not seeing any softness right now and valuations. And so I wouldn’t expect to see it. I think if you’re sorry. That’s pretty good news. You know, I think demand will continue to be high. And certainly demand is the biggest lever on what drives valuations.


Ryan Barnett  12:52

Matt, any follow up thoughts on it?


Matt Lockhart  12:57

Just kind of add into your point, Ryan around cashflow, strong cash flow balance sheet enables a pretty direct return. And, you know, we see that we see that with our customers. And so yeah, adding that to all of those other factors strategically getting better beat in the competition, getting the customers right vantin Going up market, it’s it’s all good. It’s all good. It’s fun. I mean, you know, you come out of the holiday season. And you know, you’re there’s a natural aspect of kind of gratitude, right. And I know that that’s where Mike and I kind of ended up the year and how, but it’s so great to see. It’s so fun to be involved in this and to have and for us to be able to play our little part. So yeah, it’s Let’s go. It’s straight.


Ryan Barnett  13:53

I agree. That’s all the questions I have here today. To sum it up, the macroeconomic environment will may seem tepid is quite the opposite in when you’re specialized within the IT and tech enabled services market. We’re seeing a lot of valuations continue to be held up in similar. We’re seeing buyers really heat up their initiatives to look at strategic growth, unity and acquisitions as a lever and a tool to continue their growth plans. And in general, we’re seeing healthiness in this in this market for kind of middle market IT services leaders. Mike, I’ll leave it to you for any last thoughts. Turn it over to you.


Matt Lockhart  14:39

Yeah, I would say, you know, we asked every day I mean, we talked to lots and lots of firms every day about their general outlook on business health. Do they see any sort of customers pulling back and is their concerns about, you know, the quality of their growth of their business and none of them are saying they’re seeing headwinds. And certainly, you know, I wouldn’t expect that in a relatively mild recession or broader recession. We’ve certainly been through mild recessions and tech services in my lifetime. And we certainly have not seen them be materially impacted. If we juxtapose that to major you no recession, certainly there has been impact. But we’re not. It could argue whether we’re going to have this quick quote unquote, soft landing or a recession at all, I guess. Certainly, we don’t see it. In the tech services market. Our clients that we talk to every day and and folks that we talked to more broadly in the market don’t really see it. So we’re hopeful that certainly that’ll flow through to having us have a very robust year for m&a as well, I think it all is connected, and they’ll translate to more health and growth all the way around. Now, I don’t know if you have any other closing words before we wrap it up? How do we do it, Mike, how do we wrap this up? We do it by tying a ribbon on it. So as we say every week, it’s time to do that. We wish you guys all the best. Have a great week. Stay tuned, more relevant and exciting topics on how to grow firm and or facilitate m&a transactions in the tech enabled services space coming Tune in next week, where we’ll be addressing some of those. Thanks a lot and make it a great week