Is the M&A freeze thawing? CFOs are on the hunt again

CFOs have had to look inside their businesses to find growth in recent times. But with borrowing costs on their way down, could strategic acquisitions be back on the menu? It’s been a long M&A winter:

—
Read time: 8 minutes 4 seconds
⧗ Written by Katishi Maake and Secret CFO

Legacy ERPs lock you in with expensive and lengthy contracts

Campfire, the AI-native ERP built for modern finance & accounting teams, has already broken down the technical barriers of migration from legacy ERPs.

Now, it's making sure it isn't a budget decision. After a recent $65M Series B, Campfire is sharing the love. They’ve decided to set up a $5M fund to buy you out of your ERP contract if you change to Campfire by the end of the year.

Claim your share of the CFO Buyout Fund

In the immediate aftermath of the pandemic, dealmaking was through the roof.  Cheap borrowing, abundant credit, and stimulus funding all led to a boom cycle that saw record-breaking valuations and deal volume. 2021 saw a 57% and 24% jump in global deal values and volumes, according to PwC.

This included a number of giant deals, like the $19.7 billion Microsoft acquisition of Nuance Communications, the $14 billion acquisition of Lundin Energy's oil and gas portfolio by Aker BP, and the $17 billion merger of Cimarex Energy and Cabot Oil & Gas.

When PwC published that data in April 2022, they foreshadowed that it would be difficult to match that record-breaking year moving forward. 

“Dealmaking will likely remain robust in 2022…but it's feasible that the top may come off the market, given increasing macroeconomic and regulatory headwinds,” Brian Levy, global deals industry leader at PwC, said at the time. 

But no one could quite see the extent of the nosedive in M&A coming. In 2022, deal values fell by 37% (per PwC), with the impact felt across all sectors. And they haven’t really recovered since.

Well, it’s impossible to pin it down to one explanation. But if you had to, interest rates would be a good place to start. 

Think back to the beginning of the ZIRP era, when the wholesale cost of capital went to near zero. It was Christmas every day for private equity. Even the most rudimentary financial engineering could unlock huge gains. That golden era lasted nearly 15 years, right up to 2022, fueling valuation multiples and making it an easy decision for asset owners to sell up when the time was right.

Throw higher interest rates, continued geopolitical fog in a pot, and add a dash of tariff uncertainty, and you get to where we are now. An M&A market with mounds of dry powder sitting on the sidelines, but buyers who feel valuations need to come down, and sellers still living in a ZIRP fantasy land.

So with M&A activity down for the last three years, businesses have had to focus more on organic growth to inch their business forward. 

“When times are challenging, it's a great time to be proactive,” Robert Schmidt, managing director at Bridgepoint Investment Banking, told us. “Not just managing and taking things as they come, but finding ways to be more proactive on how you can manage the business, optimize revenue and costs.” 

Investment banks and advisory firms have been predicting an upturn in deal activity for the past few years. It hasn’t happened yet, with Schmidt admitting to wishful thinking in the recent past.   

But finally, he might have the evidence to back up his optimism.

He said his firm is on track to have a record year from a fee perspective, with a number of deals set to close before the end of Q4. He added that industrials and industrial services are the most active sectors due to their mission-critical nature, ties to infrastructure and manufacturing, and long-term sticky contracts.

Q2 and Q3 of this year have also seen a bump in sell-side NDAs reviewed by buyers, according to proprietary data from legal automation firm Ontra. More NDAs indicate that more processes are starting, which could signal an increase in deal activity soon.

With the Fed cutting rates another quarter point last week, and another interest rate decision before the end of the year, there might be some more tailwinds for dealmakers ahead that can only help the situation.

Although Fed Chair Jerome Powell was on hand to quell deal junkies’ hopes of back-to-back rate cuts: “A further reduction in the policy rate at the December meeting is not a foregone conclusion. Far from it,” Powell said. “Policy is not on a preset course.”

But that hasn’t deterred Schmidt, who said lower interest rates, if coupled with a more stable geopolitical environment, could lead to growth in M&A activity in 2026. Despite weak consumer sentiment. 

“When people started getting comfortable with the certainty of the uncertainty, that kind of made them a little more comfortable to start exploring transactions,” he said. 

CFOs paying attention will be ready when it's time to strike a deal.  

Mike Duffy is one CFO waiting for the M&A market to heat up again. “We have an equity partner who’s engaged and wants to partner with us on a deal,” Duffy, CFO of self-storage company Arcland Property Company, said. “We’ve seen some pretty good reception as it relates to stabilized assets.” He added:

Balance is critical to Lee Christoff and his vehicle maintenance software business, Noregon Systems, which has seen two deals fall through since 2023. The company is focusing on organic growth while waiting for more favorable conditions to close deals.

Lee views growth decisions as a tradeoff between speed, cost, and execution risk. While M&A can provide access to a new market or capabilities, it also carries a lot of risk. Organic growth may be slower but offers greater control and, at the moment at least, efficiency. 

Lee oversees sourcing, initial engagement, and the early diligence process for Noregon Systems. He’s a one-man corporate development team, in a sense.

When weighing acquisitions, Lee thinks about how long it would take the engineering team to build an equivalent, viable product internally versus closing on a deal. This is the key trade-off when deciding whether a deal is right or not.

“In the back of your mind, you're always wondering, ‘Why is this person selling?’” he said. “And sometimes we've come across deals and found this person's selling because they know the gravy train's about to come to an end and they want to cash out while they can.”

That hesitancy and second-guessing encapsulate the M&A dilemma of the past three-ish years: no one wants to be on the bad end of a deal. Dealmakers need lower entry multiples to reflect post-ZIRP rates, and asset owners haven’t been ready to adjust their own expectations. 

Maybe lower rates will help bridge the gap. Or maybe maturing debt will force sellers’ hands and bring them to the table.

Either way, something will have to budge if deal volumes are to return to anything close to 2021 levels.

The questions your board will ask - beat them to it: