After cruising on a high-speed highway, plastics mergers and acquisitions hit a speed bump in the second half of 2022.
And now there are some questions as to whether deal activity can get back up to speed in 2023.
For full-year 2022, the number of plastics M&A deals came in at 363, down almost 34 percent vs. the 485 that were seen in a record-breaking 2021. That's according to deal data compiled by P&M Corporate Finance of Southfield, Mich.
Pent-up demand from the 2020 pandemic year and concern about potential tax hikes in 2022 sent deal volume soaring last year. The 2022 plastics M&A total was almost 8 percent higher than 2019, the last full year before the pandemic.
Financial pros contacted recently by Plastics News cited higher interest rates as a major reason for the slowdown in M&A activity. The federal funds interest rate began 2022 at 0.25 percent, but the Federal Reserve then began a series of rate hikes designed to slow inflation. By the end of the year, the rate was between 4.25 and 4.5 percent.
The rate had been near zero since late 2008, when it was lowered to help the economy recover from the financial crisis of 2007-08. It began to increase slightly in 2016 and had reached 2.5 in 2019 before declining again and being dropped back to near zero to help the economy recover from the COVID-19 pandemic.
Those moves have slightly cooled inflation, which was at 6.5 percent for the 12 months ending December, down from 7.1 percent for the previous month. Inflation had averaged around a 2 percent annual rate for most of the 2000s and 2010s.
Several reasons have been given for the surge in inflation, including strong demand during the pandemic, supply chain problems and the impact of the federal stimulus program, which provided funding to businesses and individuals.
"Interest rates were part of the issue," PMCF Managing Director John Hart said. "In the second half, we started to see the impact of higher interest rates on the broader economy. There were lower levels of M&A activity as buyers became more cautious and debt markets contracted."
"In general, we've seen a change in the market staring in mid-2022," added Andrew Petryk, managing director with Brown Gibbons Lang in Cleveland. "Pricing is down, and buyers are fleeing to quality."
In Wilmington, Del., Montesino Associates LLC "is seeing much more carefully thought-out activity," according to Managing Director Peter Schmitt. "It's not the free-for-all that it's been in recent years," he said.
Comparisons to 2021 also affected the perception of 2022, added Rick Weil, managing director with Mesirow Financial in Chicago.
"2021 was an absolutely epic year," Weil said. "We closed 19 packaging deals, which was more than double our previous record. But in 2022, people expected the world to fall apart after the first six months."
Andrew Munson, a partner at MBS Advisors in Florence, Mass., described the current market climate as Economics 101.
"Interest rates go up, multiples go down, and deal activity goes down," he said.
Strategic clients and buyers at Polymer Transaction Advisors Inc. in Foxfire, N.C., are concerned about price volatility, according to President Bill Ridenour. "A lot of businesses are treading water now, so it's hard to predict how they're going to perform," he said.
Interest rates "have started to bite for the first time in a long time," said Phil Karig, managing director with Mathelin Bay Associates in St. Louis. "Suddenly, there's a question of who will finance a deal for you."
"Clearly there was more uncertainty in the second half of 2022," added Andrew Hinz, managing director with Grace Matthews Inc. in Milwaukee. "To some degree, it was caused by interest rates. The appetite to lend was down as lenders pulled back and became more conservative. They're increasingly more concerned about the general economic outlook."
"Interest rates are a key component to any debt financing," said Matt Yohe of investment firm MPE Partners in Cleveland. "They affect what private equity firms can pay for businesses through a combination of price and leverage. And the amount they can borrow is down."