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5 Trends that Will Drive the MSP Market in 2023

As 2022 ends, MSPs are assembling their plans for 2023. The plans that work will tap into trends that are developing over the next 12 months. What are they? Here are five major trends that will shape the MSP market in 2023.

M&A Trends

As 2022 ends, MSPs are assembling their plans for 2023. The plans that work will tap into trends that are developing over the next 12 months. What are they? Here are five major trends that will shape the MSP market in 2023.

  1. Consolidation will be top of mind 

  2. Inflation will cause a rethink of data center investments

  3. Data recovery will be in demand

  4. CRaaS will present an enormous opportunity

  5. Data tiering will be top of customer to-do lists

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Direct Lenders: Cautious But Optimistic

Direct lenders to private equity-backed middle-market companies are concerned about increased risk from rising interest rates, inflationary pressures and a potential recession. But they’re also enjoying healthy returns in part due to their larger peers moving out of the middle market.

lenders

Direct lenders to private equity-backed middle-market companies are concerned about increased risk from rising interest rates, inflationary pressures and a potential recession. But they’re also enjoying healthy returns in part due to their larger peers moving out of the middle market. Direct lenders to private equity-backed middle-market companies reported record deal flow and capital deployment in 2021, and they were on a similar pace in the first half of 2022.

“For WhiteHorse Capital, a direct lender with $11.8 billion in committed capital, deal flow in 2022 has been robust—at or near all-time highs—from new sponsor-led buyouts and add-on acquisitions, and from recapitalizations for both sponsor-led deals and for companies directly. Compared to just before the pandemic, deal flow is up 60 to 80 percent,” says Pankaj Gupta, president of WhiteHorse U.S.

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As financial markets dampen RIA valuations, buyers get creative with deal structures

A report from DeVoe & Co. shows dramatic drop-off in fourth-quarter deals, but the biggest buyers say they are as busy as ever.

A report from DeVoe & Co. shows dramatic drop-off in fourth-quarter deals, but the biggest buyers say they are as busy as ever.

With just three deals during the last three weeks of October, an 81% drop from the monthly average of the last 12 months, and a similarly sluggish outlook for the November, the writing is on the wall, said David DeVoe, founder and chief executive of the research firm.

“The wheels fell off the M&A train in early October,” DeVoe said. “2022 delivered three quarters of unexpectedly strong activity, given the market environment. High interest rates, a declining stock market and a challenging economic environment typically drive down M&A. It remains to be seen if these pressure points are creating a short-term lumpiness of volume or a sustained downturn.”

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Key Aspects of SAAS Revenue Recognition and M&A Due Diligence

Cloud-based software-as-a-service business models are enabling rapid growth, and the accounting industry needs to adapt. Stout’s Steve Sahara, Jeremy Krasner, Brad Burch, Kevin Pierce, and Joe Randolph share some important aspects of SaaS revenue recognition.

M&A Due Diligence

Cloud-based software-as-a-service business models are enabling rapid growth in some of the most innovative software-service companies. As technology companies evolve to meet market needs, the accounting and financial services industry must also adapt to address investor needs for financial reporting, business valuation, M&A transaction due diligence, and dispute resolution.

Four of Stout’s service groups discussed the key aspects of SaaS revenue recognition. Steve Sahara, director in Stout’s disputes, compliance, and investigations practice, interviewed Jeremy Krasner, managing director in the valuation advisory practice; Brad Burch, managing director in the accounting and reporting advisory practice; Kevin Pierce, managing director in the disputes, compliance, and investigations practice; and Joe Randolph, managing director in the financial due diligence practice of the transaction advisory group.

“The SaaS model provides customers with many benefits, and it has been a strong performer for investors. Certain SaaS businesses, or at least those with high revenue, have historically delivered revenue growth in excess of 30% but with cash flow margins of negative 20%, as well as significant research and development and sales and marketing expenditures. Over the past five years or so, the higher-revenue-growth companies were rewarded with higher valuation multiples despite the negative cash flow,” says Jeremy Krasner, a managing director in the valuation advisory group at Stout and is the Tysons Corner office leader.

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Deals Done Efficiently: Four Things M&A Advisors Need to Know

Consideration of both pre- and post-closing deal requirements creates a more holistic client experience. While M&A advisors (and their clients) may not be thinking about closing mechanics and post-closing matters now, doing so can help drive efficiencies, ensure a smoother close, and remove added work and headaches later in the deal process.

M&A Advisor

Consideration of both pre- and post-closing deal requirements creates a more holistic client experience. While M&A advisors (and their clients) may not be thinking about closing mechanics and post-closing matters now, doing so can help drive efficiencies, ensure a smoother close, and remove added work and headaches later in the deal process. SRS Acquiom offers these tips to help you provide more value in your role as an M&A advisor.

“M&A advisors play a pivotal role in managing the deal process and can be essential in navigating the elements of a transaction across its lifecycle—striving to ensure all parties arrive at closing as efficiently as possible. In private M&A transactions, the client’s journey doesn’t end at the deal closing. Issues with working capital adjustments, earnouts, escrow releases, and potential claims can cause the M&A post-closing mechanics to play out for quite some time. Considering these kinds of post-closing challenges earlier in the deal can help drive efficiencies and remove added work later in the deal process. Based on our experience servicing more than 6,300 deals with an aggregate value of more than $775 billion, the team at SRS Acquiom presents the following information to consider on your next transaction,” says Paul Koenig, CEO and Co-Founder, SRS Acquiom.

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The Big Picture: 2023 M&A Outlook

A look ahead to the key strategic trends expected to impact the overall M&A environment and some key sectors.

M&A opportunities

A look ahead to the key strategic trends expected to impact the overall M&A environment and some key sectors, presented by S&P Global.

“The volatile equity markets, rising interest rates and economic uncertainty have weighed on M&A activity. The lower equity valuations have reduced buyers’ purchasing power, and the higher cost of financing has increased the cost of making acquisitions. Escalating inflation and geopolitical turmoil stemming from the war in Ukraine have weakened executive confidence, which is a key driver to M&A. The structural headwinds have pushed many buyers in the private equity industry to the sidelines and have greatly reduced the number of large transformational transactions that led to record-setting M&A in 2021.

Overall M&A activity plummeted in 2022, and a sharp turnaround is not on the near-term horizon.  

Central banks have been raising interest rates to combat inflation. The moves hurt M&A as they led to equity market volatility and increased cost of acquisition financing. Companies have been able to absorb the increased costs on their debt because corporations were flush with cash coming out of the pandemic thanks to government stimulus efforts. However, many have been burning through reserves, and the higher cost of financing will eventually force more sellers into the market.”

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Flourish of M&A Deals in the Small-Cap Software Tech Space

Australian small-cap software companies have been severely oversold and as a result have been swarmed on in a flurry of M&A deals during October, with few signs that these deals will slow down with more likely in the pipeline.

M&A Deals

Australian small-cap software companies have been severely oversold and as a result have been swarmed on in a flurry of M&A deals during October, with few signs that these deals will slow down with more likely in the pipeline.

“National and international software firms, as well as private equity firms, have taken advantage of these low valuations, offering huge premiums in an attempt to secure control of the companies in question,” says Peter Milios, a research analyst for Corporate Connect Research.

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Morgan Stanley to start layoffs in coming weeks as dealmaking slows

Wall Street major Morgan Stanley (MS.N) is expected to start a fresh round of layoffs globally in the coming weeks, three people with knowledge of the plan said, as dealmaking business takes a hit due to rising inflation and an economic downturn.

China layoffs

Wall Street major Morgan Stanley (MS.N) is expected to start a fresh round of layoffs globally in the coming weeks, three people with knowledge of the plan said, as dealmaking business takes a hit due to rising inflation and an economic downturn.

In Asia Pacific, the bank has drafted up a list of staff members considered redundant, who will mainly come from teams that focus on China-related business, two of the sources said. All declined to be named as the information is confidential.

Morgan Stanley last month reported a 30% slump in third-quarter profit, missing analysts' estimate as a slowdown in global dealmaking hurt its investment bank business. It hinted that some cost-cutting actions were on the radar.

"We're looking at headcount," Chairman and Chief Executive James Gorman said in a conference call last month, without providing details. “You've got to take into account the rate of growth we've had in the last few years, and we've learned some things through COVID about how we can operate more efficiently."

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Healthcare M&A in 2022 – Up or Down? It Depends

Getting an understanding of whether 2022 healthcare merger and acquisition activity has slowed, is slowing, is leveling out, or is actually on the rise depends on what data, trends, and market information you are analyzing.

Healthcare M&A

In the last 10 years, we have had periods when the media has reported healthcare M&A at its highest level ever. However, when you dig into the data used, it shows one large multi-billion-dollar pharmaceutical merger is leading to those headlines. The flip side is that in some of those same periods primary middle-market portfolio company acquisitions in healthcare were flat, if not dead. What’s actually happening in 2022 is definitely an “it depends” scenario.

“As a threshold matter, private deals are not always reported publicly. So, data on exactly what is happening in the middle market isn’t always spot on. Often deal makers get a sense of what is happening anecdotally through their own experience, service providers, the media, and other sources of information. While many media outlets have reported healthcare M&A activity as flat in 2022, when you talk to investors, lenders, M&A counsel, and third-party transaction advisors, you get a very different picture. Those discussions lead to a picture of a marketplace that is extremely active, just possibly not in the ways buyers, sellers, and their advisors would prefer. Deals are happening, marketplace participants are working hard, but healthcare M&A is in a different place, with certain headwinds that historically we have known how to deal with and others that are new challenges,” says Ari Markenson, a Partner with law firm Venable LLP and a Contributor to Mergers & Acquisitions.

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Is Latin America the next frontier for technology M&A?

In a region suffering from global trade dislocations, inflation, higher interest rates and complex political cycles, dealmakers remain cautiously optimistic that the transition to digital services across the region will create significant M&A opportunities in the technology sector. 

Latin America M&A

“In a region suffering from global trade dislocations, inflation, higher interest rates and complex political cycles, dealmakers remain cautiously optimistic that the transition to digital services across the region will create significant M&A opportunities in the technology sector,“ says Rodrigo Dominguez Sotomayor from the Whitecase.

Historically, transactional activity in Latin America has been driven by energy and infrastructure transactions. In the past two decades, the region experienced significant growth as most of its largest economies enjoyed political stability and adopted market-friendly policies that attracted significant foreign direct investment. Commodities played an important role in this growth. Latin America is home to some of the world's most abundant reserves of metals and minerals. The region also has vast reserves of oil & gas, which fueled major infrastructure investments throughout the region. 

As a result, Latin America is more connected and prosperous than ever before.

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Bain Capital Sees 'Golden Age' for Private Equity in Japan

David Gross-Loh, managing director of private equity at Bain Capital, discusses the firm's investments in Japan, and the opportunities he sees in other Asian markets. Bain Capital-led group succeeded in its tender offer for Hitachi Metals Ltd., a unit of the Japanese conglomerate. Gross-Loh speaks with Haidi Stroud-Watts and Kathleen Hays on "Bloomberg Daybreak: Australia.

Private Equity in Japan

David Gross-Loh, managing director of private equity at Bain Capital, discusses the firm's investments in Japan, and the opportunities he sees in other Asian markets. Bain Capital-led group succeeded in its tender offer for Hitachi Metals Ltd., a unit of the Japanese conglomerate. Gross-Loh speaks with Haidi Stroud-Watts and Kathleen Hays on "Bloomberg Daybreak: Australia.

“Japan is coming into a Golden Age for Private Equity. There’s been a tremendous amount of developments in the infrastructure to support the private equity transactions that we and others do, there’s been a serious focus on corporate governance, large corporations are trying to get more efficient and therefore divest some of their non-core business. But you also see a lot of founder-owned businesses that are looking for succession alternatives that’s creating some opportunities. So the convergence of the number of these forces is creating a lot of opportunity,” says David Gross-Loh.

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World crises driving 'virtually unprecedented' complexity for insurers

The combined effects of economic and geopolitical crises are driving “virtually unprecedented levels of complexity” in the business environment for insurers and reinsurers, according to Munich Re.

M&A Investment

The combined effects of economic and geopolitical crises are driving “virtually unprecedented levels of complexity” in the business environment for insurers and reinsurers, according to Munich Re. High inflation is having an especially profound impact on loss expectancy in many operating segments. Also driving the issue are the changing landscapes for risks like cyber and climate change, and the fallout from the COVID-19 pandemic.

In an effort to combat skyrocketing inflation, central banks have hiked interest rates, which in turn can impact the balance sheets of insurers and reinsurers as a result of fixed-interest securities losing value. Rising interest rates can also initially trigger a decline in re/insurers’ capital bases and affect their capacity, despite higher rates having a positive impact on earnings in the medium term, Munich Re said.

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Mergers & Acquisitions Forum: Discussion Recap

After an extraordinarily busy year in merger and acquisition activity in 2021, the Business Courier held a forum featuring experts in that space who assessed the current environment for deals and looked ahead to what might be next given the current economic conditions.

M&A Advisor

After an extraordinarily busy year in merger and acquisition activity in 2021, the Business Courier held a forum featuring experts in that space who assessed the current environment for deals and looked ahead to what might be next given the current economic conditions.

The featured panelists were: Kevin Bruegge, a private wealth advisor and managing director of The Evelo|Singer|Sullivan Group wealth management firm; Keith Carlson, managing director and shareholder in VonLehman CPA and Advisory Firm; and Michael Hurley, a partner at Calfee, Halter & Griswold LLP, who practices in the corporate law and finance arena. The forum was held Sept. 29 at the offices of the Cincinnati USA Regional Chamber and was moderated by Steve Watkins, a Business Courier reporter who covers banking, finance, and investments.

Watkins began by noting that 2021 saw $2.6 trillion worth of deals in the U.S., a record. He asked the panelists to comment on what kind of dynamics are affecting the M&A market currently. Hurley commented that this year has still been very strong, but not nearly as much volume as last year. He usually represents companies in the middle-market range, $30 million to $100 million in revenue, who are seeking to do private deals, so broader market forces in the overall economy have not yet trickled down to that level.

“I would say it’s not last year, but it’s still a very good year,” he said.

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Sixth straight quarterly drop anticipated in Bloomberg Survey

US mergers and acquisitions are poised to slide for the sixth straight quarter, to depths last seen at the onset of the pandemic, as a darkening outlook for deal-financing complicates an already bruising backdrop for the industry.

US mergers and acquisitions are poised to slide for the sixth straight quarter, to depths last seen at the onset of the pandemic, as a darkening outlook for deal-financing complicates an already bruising backdrop for the industry.

“Elon Musk’s proposal to buy Twitter Inc. for the original offer price gave the M&A market a jolt last month, but the deal also served to highlight the funding concerns plaguing the business now. A slowing economy and market volatility are dimming hopes for a significant rebound in new transactions in the fourth quarter, particularly for the large leveraged buyouts that fueled last year’s historic M&A boom,” according to a Bloomberg News survey of 18 event-driven/risk-arbitrage trading desks.

Deal flow may be limited given that Wall Street banks are nursing huge losses on buyout debt they can’t offload as rising interest rates and recession angst sap demand for risky assets. Cano Health Inc. topped the poll as the most likely takeover candidate in the next few months amid consolidation in health care.

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There is No Crystal Ball: U.S. M&A Trends and Prediction

When there is unpredictability in the air, risk allocation is the name of the game when it comes to negotiating M&A transactions. While the market for M&A has been record-breaking on most accounts in recent years, geopolitical turmoil, increased inflation, the stock market turning bearish, and rising regulatory enforcement all contribute to an atmosphere of growing uncertainty.

M&A Trends

When there is unpredictability in the air, risk allocation is the name of the game when it comes to negotiating M&A transactions. While the market for M&A has been record-breaking on most accounts in recent years, geopolitical turmoil, increased inflation, the stock market turning bearish, and rising regulatory enforcement all contribute to an atmosphere of growing uncertainty. A landscape of uncertainty does not mean that buyers’ appetite for strategic acquisitions will dry up entirely, but rather that buyers will look for techniques to employ to allocate risk and increase their scrutiny of target companies.

The article published by Foley talks the current legal and deal landscape and discuss a potential shift in the market. It also analyzes potential techniques and deal terms that may become more popular as we enter an unknown future regarding mergers and acquisitions.

Legal and Economic Landscape 

For dealmakers (and their attorneys) 2021 was the best year on record for global M&A, with more than 60,000 publicly disclosed deals and the aggregate deal value breaking $5 trillion for the first time. Since then, M&A activity in 2022 has slowed from its rapid pace in 2021. The value of the global M&A market fell by nearly 20% to $2 trillion in the first half of 2022 compared to the same period in 2021. The total deal market is likely to fall further as economic fallout is reflected in global markets, according to PwC’s “Global M&A Industry Trends: 2022 Mid-Year Update” report. Looking forward, M&A deals are facing the most uncertain and complex environments in recent memory. 

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Global M&A market slows in 2022 first half — but shows signs of strength

After soaring to an all-time peak in 2021, the global M&A market has hit the pause button. Early 2022 saw the value of large deals (more than $25 million) fall 24 percent from a year earlier, on a 12 percent drop in deal volume.

M&A Market slowdown

After soaring to an all-time peak in 2021, the global M&A market has hit the pause button. Early 2022 saw the value of large deals (more than $25 million) fall 24 percent from a year earlier, on a 12 percent drop in deal volume.

But the 2022 numbers match healthy, prepandemic levels and are especially notable in a time of great uncertainty. Geopolitical instability, spiking inflation, supply chain issues, skittish capital markets, regulatory changes—all these factors, and more, are fueling uncertainty.

And as Andy West, global coleader of McKinsey’s M&A Practice, says, “Uncertainty always weighs on decision making, and M&A is a big decision for deal makers. So naturally we’re seeing a bit of a slowdown.”

According to the McKinsey M&A Practice review of the global M&A market, 2022 activity has declined, but only slightly. Deal makers in the Americas have been the most active traders, delivering almost half of worldwide deal value (48 percent, versus 52 percent for all of 2021). Europe, the Middle East, and Africa’s share is up slightly (28 percent, versus 26 percent), as is Asia–Pacific’s share (24 percent, versus 22 percent).

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‘Everything in the UK is on sale,’ says US private equity executive

The plummeting value of sterling means that “everything in the UK is on sale”, according to a top executive at US private markets giant Ares Management.

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The plummeting value of sterling means that “everything in the UK is on sale”, according to a top executive at US private markets giant Ares Management.

Blair Jacobson, co-head of European credit at Ares, said he “absolutely” expected to see US investors doing more deals in the UK to take advantage of the weak currency.

“It’s a pretty big difference if you have US dollar-denominated funds,” he told the FT’s Due Diligence Live event in London on Wednesday.

A pioneer in private lending, Ares has financed a number of buyouts of listed companies after banks stepped back from the market. Traditional lenders retreated after struggling to sell on debt for deals that they committed to finance early this year.

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How ESG Is Changing the M&A Landscape

Twitter is the most high-profile acquisition on the rocks right now. While the primary reason Musk has cited for backing away from the deal is his allegation that the social media platform is infected with bots that impact fake news and, ultimately, the company’s valuation, he has pointed to diversity concerns.

M&A Sustainability

Understanding the growing importance of environmental, social and corporate governance (ESG) in the world of mergers and acquisitions requires looking no further than social media.

Countless posts on these social platforms demonstrate society’s rising concerns around sustainability standards and corporate accountability. In fact, Elon Musk’s recent attempt to acquire Twitter is the perfect example of the reach that ESG has in today’s M&A market and the broader business world.

Twitter is the most high-profile acquisition on the rocks right now. While the primary reason Musk has cited for backing away from the deal is his allegation that the social media platform is infected with bots that impact fake news and, ultimately, the company’s valuation, he has pointed to diversity concerns.

“Musk has tweeted frequently about Twitter employing workers who are insufficiently diverse in embracing a wide variety of viewpoints and perspectives,” says Dr. Michael Kraten, an ESG expert and professor of accounting at Houston Baptist University. “Ironically, the lack of diversity that he mentions involves a lack of conservative and libertarian representation.” He suggests Musk’s concerns represent issues around the G in ESG.

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Big tech set to shop for discounted startups

"There is a lot [of deal activity] in progress right now," said attorney Aly Simons, a partner and co-chair of the tech M&A practice at Goodwin. She said merger talks were nearly non-existent in the summer, but it all changed around Labor Day.

M&A investors

M&A deal advisers and investors are making moves to usher in a significant increase in acquisitions later this year and into 2023.

"There is a lot [of deal activity] in progress right now," said attorney Aly Simons, a partner and co-chair of the tech M&A practice at Goodwin. 

She said merger talks were nearly non-existent in the summer, but it all changed around Labor Day. Now she's advising on what she called a "massive set" of deals between big tech and VC-backed companies. Deals in the mix are priced in the $200 million range on up to nearly $1 billion, Simons said. She declined to give specifics on deals that are in confidential talks. Last month, Google's parent company, Alphabet, acquired Israeli climate-tech startup Breezometer for an estimated $200 million."

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All M&A Market Segments Saw Q3 Drop in Deal Volume

Last quarter’s mergers and acquisitions market results illustrate that heightened uncertainty continues to hinder M&A activity. Q3 saw a notable dip in global M&A volume compared to recent quarters, and no market segment was immune to the fall.

M&A buy a business

Q3 dip in global M&A volume isn't a surprise here:

“Last quarter’s mergers and acquisitions market results illustrate that heightened uncertainty continues to hinder M&A activity. Q3 saw a notable dip in global M&A volume compared to recent quarters, and no market segment was immune to the fall.

The degree to which Q3 2022 deal activity is down is striking. Last quarter had the second-lowest total deal volume ($504 billion) for controlling-stake transactions of any quarter from Jan. 1, 2017 to Sept. 30, 2022. Only Q2 2020—when the reality of the Covid-19 pandemic started to truly hit—had a lower quarterly deal volume ($225 billion). And Q3 2022 had the lowest total deal volume among all other Q3s since 2017”, says Bloomberg Law.

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