Interest rates are the elephant — or elephants — in the room when talking about plastics or any other kind of M&A. The federal funds interest rate began 2023 at between 4.25 and 4.5 percent before three hikes sent it to between 5.0 and 5.25. The rate had been 0.25 percent at the start of 2022, before the Federal Reserve began a series of rate hikes designed to slow inflation.
Those moves have cooled inflation, which peaked at 9.1 percent in June 2022. The rate has declined every month since then, reaching 4 percent in May. Inflation had averaged around a 2 percent annual rate for most of the 2000s and 2010s.
But higher interest rates lead to higher borrowing costs, which in turn drive down earnings multiples paid in M&A deals and lead to lower selling prices.
Among economic indicators, U.S. gross domestic product growth was just over 2 percent in 2022, down from COVID-fueled growth of almost 6 percent in 2021. GDP growth in the first quarter of 2023 was lower at 1.3 percent.
The Dow Jones Industrial Average began 2023 near 33,100 but closed around 34,050 on June 20 for a gain of almost 3 percent. The broader S&P 500 has showed much stronger growth, starting the year around 3,820 and closing at just under 4,390 on June 20 for a surge of almost 15 percent.
All of these financial factors have played a role in plastics deal volume in 2023.
"There doesn't seem to be as much activity, which isn't a surprise," said Andrew Petryk, managing director with Brown Gibbons Lang in Cleveland. "There's some level of hesitancy to bring deals to market right now. … There are questions about what's going on with the economy and if there might be a recession now or in 2024."
"Interest rates are the driver in lower deal volume," said Peter Schmitt, managing director with Montesino Associates LLC in Wilmington, Del. "If rates stay high, it will cool things off a bit and make buyers more selective in doing deals."
"We're in a weird time, but [lower deal volume] is what happens when interest rates go up," added Andrew Munson, a partner at MBS Advisors in Florence, Mass. "When multiples go down, deal volume goes down. For really good companies, multiples haven't changed a whole lot, but for the average deal, there's been a downtick."
Although several observers expected private equity buyers to be more impacted by higher interest rates — since they finance large amounts of any sale price — the percentage of first-half deals involving private equity or other financial firms actually jumped from 47 percent in 2022 to 53 percent in 2023. PMCF officials said that's the first time since 2018 that financial deals accounted for more than half of first-half activity.
Hart said that increase was because of macroeconomic uncertainty affecting strategic buyers.
"Private equity is still figuring out ways to get deals done, even if some bigger deals have been harder to do," Hart added.
Bill Ridenour, president of Polymer Transactions Inc. in Foxfire, N.C., said it was unclear how much interest rates were affecting dealmaking.
"We're seeing a pullback from strategic buyers, which is what you'd see in a recession," Ridenour added. "I think we're in one right now. People are waiting to see how much volatility there's going to be. They might not want to put big bucks into acquisitions."
At Blaige & Co. in Chicago, Chairman and CEO Tom Blaige said he's seeing deal volume down only 5-10 percent.
"There's an increase in corporate divestitures and spinoffs," Blaige said. "Private equity can draft off strategics like in a race and then move in at the end.
"But the pipeline [for deals] is shrinking as there's a flight to quality. Before, companies might look at 10 deals and do five; now they're looking at three and doing one. They don't want to get shot down by banks," he added.
Matt Miller, managing director at Cascade Partners LLC in Grand Rapids, Mich., said the market is adjusting to the higher level of interest rates. "For a long time, rates were so low it was like having free money," he added.
Deal activity at family-owned businesses "is down a little, but not as much as the overall market," according to Matt Yohe of investment firm MPE Partners in Cleveland. "Family dynamics still drive decisions."
Phil Karig, managing director with Mathelin Bay Associates in St. Louis, said higher interest rates "are starting to bite financial buyers, and there's a squeeze on the amount of credit available." He added that his firm has seen less interest in early-stage companies, as buyers want to find targets with established earnings histories.
Higher interest rates "may be an element" in lower deal volume, according to Andrew Hinz, managing director with Grace Matthews Inc. in Milwaukee, but the slowdown "also just comes down to company performance."
If a company isn't performing as well as they had hoped to when they started the process, then deals could be unfinished or pulled from the table, he said. As a result, companies in that situation may want to wait to sell until they can show continuous performance.
With borrowing costs higher, financial buyers "can stomach high interest rates for a while and hope to refinance down the road," said Rick Weil, managing director with Mesirow Financial in Chicago. He added that his firm has seen 14 or 15 first-round bids for a pair of plastics firms that it's now trying to sell.
From a geographic perspective, the percentage of first-half 2023 deals involving non-U.S. buyers or sellers increased slightly from 57 percent to 58 percent vs. the same period in 2022.