Russia, Recession, Supply Chain Challenges Impact On M&A

We have all seen, and been unnerved by, the news stories predicting an economic slow down. This, coupled with the tumult in the stock market, is enough to make anyone concerned.

Moreover, the Russian Invasion of Ukraine is likely to continue to disrupt global commodities markets. A whopping 40% of the world’s palladium comes from Russia. No palladium, no catalytic converters. No catalytic converts, no cars. Russia is also a top producer of nickel, a key ingredient in steel and electric car batteries.

Regionally there are several companies that produce products sold into the auto industry which will likely have to grapple with these challenges. On a positive note our region also has a number of companies that are directly or indirectly involved in supporting defense contractors. Demand for defense related products has already increased, caused directly by the demands of the conflict in Ukraine or by the general rebuilding of military inventories that this conflict has spurred.

Further, supply chain issues continue to bedraggle businesses in the region, particularly labor and component shortages. Many of our clients are in the enviable position of holding backlog orders all the way out into 2024. Unfortunately, that same dynamic is impacting businesses on the supply side, facing orders delayed or on hold due to their own vendors not having sufficient components to complete projects. Finally, the labor market has not significantly eased; demand for skilled and unskilled labor in regional manufacturing companies has remained high. This has not only slowed local business’ ability to produce but has put wage pressure on their margins.

On the other hand, while wages, shortages, and price rises are signs of an overheating economy, we have also seen new housing starts decline. Whether this change is caused by inflation increasing the cost of construction, interest rate increases, a recession or industry cyclicality is still unclear.

With the national economic position in mind then, how is this all playing out in M&A? My peers nationally and our firm continue to see robust activity from sellers and from buyers, particularly private equity. Private equity has well over $2 trillion in ‘dry powder’ to invest in privately held companies. Outreach from private equity to our firms remains as active as we have seen in the 18 years of our history. The modest interest rate increases have had little to no impact yet on a willingness to do a transaction or business valuations.

Where we are seeing an impact is in the level and amount of due diligence. Buyers are spending a significant amount of effort understanding the supply chain risks and other issues associated with economic slowdowns. It is not unusual for a buyer to ask for financial statements going back to 2007/2008, our last recession.

The other area of concern is the growing gap in valuation caused by the pressure on margins from inflation and supply chain issues. These issues frequently result in declining EBITDA (earnings before interest taxes, depreciation and amortization). As EBITDA is a core datapoint in valuing a business for sale, this decline can impact the value expectations of sellers.

Overall, our firm and our national alliance (Cornerstone International Alliance) remain cautiously optimistic for the general M&A environment.

Bob McCormack, CVA, MBA, M&AMI, CM&AP
Murphy McCormack Capital Advisors

Bob founded Murphy McCormack Capital Advisors in 2005 after a successful career in financial services. He is the former president & chief executive officer of SunBank, a regional financial services company with more than $1 Billion in assets. As CEO, he negotiated and implemented numerous acquisitions. With more than 25 years of financial services experience, Bob also has extensive financing expertise and contacts.

As a former head of commercial lending and as a former commercial loan relationship manager, Bob witnessed first-hand the need in the market for professional merger & acquisition services and transition planning assistance, particularly with privately held, middle market companies. This led him to establish Murphy McCormack Capital Advisors.

Bob has attained the designations of Certified Valuation Analyst (CVA), Merger & Acquisition Master Intermediary (M&AMI), and Certified Business Intermediary.

Bob is a Registered Representative of and securities are offered through Ceiba Financial, LLC. Member FINRA/SIPC. Murphy McCormack Capital Advisors and Ceiba Financial, LLC are separate and unaffiliated entities.