Mergers & Acquisitions: SME purchase prices on the decline

The M&A market has been strongly affected by the current economic climate. According to the Argos index, in Q1 2023, the purchase price of SMEs was 9.7 times their gross operating income, down on last year.

SME prices at their lowest for 3 years

" Valuation levels are beginning to be affected by the sharp deterioration in the political and economic context," Argos partner Louis Godron tells Les Echos newspaper.

Proof that momentum is slowing, unlisted European SMEs were sold at an average of 9.7 times EBITDA in Q1, compared with 9.9 times in 2022. This is the lowest value recorded since H1 2020, according to theArgos index. The last peak was in August 2021, with an average valuation of 11.6 times Ebitda.

A number of factors weighed on the M&A market, including the war in Ukraine, the sharp rise in inflation as a result of higher energy and commodity prices, and falling growth in the USA and Europe.

Certain sectors better valued

Although average valuations are falling, some sectors are managing to come out on top. Transactions in excess of 15 times Ebitda account for 14% of the transactions analyzed by Argos since Q1 2022, and all concern the Tech and Pharmaceuticals sectors.

Conversely, in European industry, prices have fallen to 9.5 times Ebitda, compared with over 11 times in 2021.

On the listed market, the price correction is more violent than on the unlisted market, prompting funds to buy up companies on the stock market. In July 2022, for example, Astorg Asset Management reported that it had offered to buy the British business-to-business information company, Euromoney, for $2 billion.

No major changes expected

"It' s mainly the top end of the market that's been affected, with values of between €150 and €500 million. Business remains resilient on smaller transactions ", explains Louis Godron.

The main reason for the market's deterioration is the low share of investment funds. This is currently below 15%, whereas two years ago it exceeded 20%. As a result, leveraged buyouts (LBOs) remain limited.

As for price trends over the coming months, Louis Godron is cautious, pointing out that " valuations are inversely related to interest rates. However, we are still a long way from the 4% rates seen in 2007-2008, when multiples were close to 8 to 9 times Ebitda ".