Buyers are ready to pull the trigger on M&A deals if they can overcome the financing hurdles and get sellers to capitulate.

Higher interest rates, stock market volatility and economic headwinds depressed the valuations of many public and private companies throughout much of 2022. This has led to many companies with stronger balance sheets wondering if they can purchase their preferred targets at lower multiples, according to participants who took part in S&P Global Market Intelligence's M&A in Focus webinar held in December 2022.

James Socas, a managing director of tactical opportunities and growth at Blackstone Inc., said the lower equity prices are leading to some buyers making take-private offers on companies that have seen their stock prices fall. Publicly traded buyers are examining the landscape and eyeing competitors that can help them expand or move into new areas.

"[They're] saying it's an opportune time given the price reset to do some mergers and acquisitions," Socas said.

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Still, buyers are being cautious given the uncertain economic outlook, and this is part of the reason that M&A activity fell in 2022 year over year. A lack of cross-border activity is one sign of that risk averseness, said Chris Ventresca, global chairman of investment banking and M&A at JPMorgan Chase & Co. Cross-border M&A typically makes up 30% to 35% of deals, but that number has been closer to 25% of late, Ventresca said.

"Cross-border deals generally are more complex," Ventresca said. "They require a little more bravery, a little more leap of faith for companies."

The economic environment has many buyers shying away from larger deals. Ventresca said buyers are hesitant to acquire targets that are one-third or more of their market cap because those deals may require taking on extra leverage at a time when many are concerned about a recession. Also, issuing stock to fund deals is less attractive given the reduced equity prices.

"So you're siphoning and filtering out those bigger deals and ultimately looking at smaller deals," Ventresca said.

Sellers are also hesitant to agree to deals because many of their valuations fell during 2022. But even with the lower prices, some are considering sales because they don't see the economic headwinds in their respective industries dissipating anytime soon. Potential sellers can view M&A as a way to lock in a market premium rather than run the risk of competing in a difficult operating environment.

"Those are real debates happening in the boardroom," Ventresca said.

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Companies with lower-rated debt will have a more difficult time staying independent because they often face escalating financing costs in a rising-rate environment. S&P Global Ratings Chief U.S. Economist Beth Ann Bovino noted that while many investment-grade companies have locked in fixed-rate bonds for longer durations, those with speculative-graded bonds often have floating-rate debt.

"Yields for single-B bonds have doubled most recently," Bovino said during the event. "That's a lot of pressure."

Bovino added that the sectors that are seeing the most pressure include health care, consumer products, technology and media and entertainment.

"That's where the pain we're starting to see already has been played out in markets," she said.

M&A can serve as a liquidity option, especially for private companies that have been willing but unable to execute an initial public offering because of the disruption in the equity markets, said John Potter, a partner and U.S. deals sector leader at PwC. He added that the lack of IPO activity can help fuel M&A in sectors such as technology.

Technology has been a catalyst for cross-sector M&A for years, and Potter expects that to continue. He noted that industrial companies are focusing on digitalization, while consumer companies are looking to enhance digital offerings that can improve the customer experience. Technology has also been a driver of M&A in the financial services sector, Potter said.

"We'll continue to see that investment from across other industries," he said.

Blackstone's Socas said technological development has not stopped, and his firm has been seeing good investment opportunities in private companies. He said there are "some terrific companies" with $150 million to $250 million in revenue that are seeking investments to hold them over until the IPO window opens. Socas added that Blackstone has also been making equity and preferred equity investments in growth companies.

"There are some incredible innovation cycles going on right now," he said.

But if any of those sought-after growth companies are ready to sell at current valuations, they should have the potential to find ample suitors.

"There's a hungry appetite in the buyer universe to try to get deals done," Ventresca said.