Future of M&A Activity Could Accelerate
NEWS PROVIDED BY: San Francisco Business Times –
“There are particular flavors of divestitures, and we’re going to see more in 2023, particularly around corporate parents divesting unproductive units or nonessential business units,” said Paul Lennick, senior vice president of M&A services at ContinuServe. The former operating director at private equity firm Apollo Global Management now works with private equity firms buying middle market companies that are seeking to quickly streamline their operations and cut costs through outsourcing and other measures. Lennick’s firm has worked with private-equity-backed cosmetics company Orveon in its purchase of Laura Mercier, BareMinerals and Buxom from Japanese cosmetics giant Shiseido. The maker of BareMinerals once called San Francisco home.
Typically, there are 600 to 700 so-called carve outs from larger companies every year. Lennick expects this year that number will rise at least 50% if not more, given the recession and softening demand.
The factors fueling that increase will not come as a surprise to those following the massive layoff announcements. Companies are taking a sharper pencil to their operations and the growth projections that no longer seem realistic.
“There was just an over-extension of spending that went through 2021 and an anticipation that things would continue into 2022,” Lennick said. Now those companies are turning to M&A to divest operations that are a drag on profitability, often turning to private equity firms that have plenty of dry powder to make acquisitions at the right price.
In addition to seeing more private equity deals, these investors will likely hold their portfolio companies longer, so rather than a typical three to five year holding period, they may hold on to an investment for a year or two longer.
The slowing economy has also pressured how quickly private equity firms seek to turn around the fortunes of a newly acquired company. Popular moves include streamlining operations, outsourcing, cutting staff and, as Lennick puts it, “firing unprofitable customers.”
“There’s a sense of urgency that really kicked in this year,” Lennick said in discussing private equity firms pushing newly acquired portfolio companies to take steps to improve operations so they can weather the downturn.