Nearly 200%.

That’s the increase in business valuation requests received in January 2024 compared to January 2023 by Certified Marketing Consultants (CMC), a firm that specializes in advising promotional product companies on private sales and mergers/acquisitions.

A top reason owners seek a valuation request is that they’re interested in potentially selling their business. The unprecedented year-over-year surge in valuation inquiries by promo firms to CMC may foreshadow what some executives believe will be a trend in the branded merchandise industry’s 2024: Namely, an increase in mergers and acquisitions following what was a muted period for such dealmaking in the latter half of 2023.

“There are signs that both buyers and sellers are acclimating to the new environment and finding ways to make acquisitions work,” says Jamie Watson, a promo M&A expert and partner at CMC.

Mergers and acquisitions in the industry might already be picking up.

In recent years, January has seen a flurry of acquisitions announced in promo, including blockbusters like Top 40 supplier SnugZ USA (asi/88060) buying then fellow Top 40 firm Sweda in 2022 and Top 40 supplier HPG (asi/61966) purchasing then Top 40 supplier Evans Manufacturing (asi/52840) in 2023.

No such megadeals among Top 40 companies occurred this January, and executives observe the number of announced acquisitions was down from years past through the early weeks of the year. Still, that started to change as February neared.

https://t.co/wmhGmaZHSq

— Chris Ruvo (@ChrisR_ASI) February 1, 2024

During the week of Jan. 28, news broke on at least five industry acquisitions, including Top 40 distributor Geiger (asi/202900) purchasing a New York-based distributorship with a 68-year history and Mississippi-based The Specialty Company (asi/341203) making its fourth acquisition since 2021 by buying North Carolina-headquartered Perfect Promotions & More Inc. (asi/293554). Some industry leaders think it’s a sign of things to come.

“I do expect to see an uptick in promo M&A,” says Chris Anderson, a member of Counselor’s Power 50 list of the industry’s most influential people and CEO of HPG, which has been active making strategic acquisitions in recent years.

“It appears,” Anderson continues, “that we may have avoided the prolonged economic downturn that the Federal Reserve has fought vigorously to prevent. Put simply, more economic confidence in the near- to mid-term could equal more deals getting done.”

A Decline in Dealmaking

The possible rebound in promo M&A comes after what executives say was a relative fallow period.

Following a lull during the darkest days of the COVID-19 pandemic, merger and acquisition activity in the promotional product space reignited in the latter half of 2021 and remained strong in 2022. The dealmaking continued at a relatively quick clip into early 2023, but fizzled as the year went on, M&A experts in promo tell ASI Media.

“It’s fair to say M&A slowed in the third and fourth quarters of 2023,” says Watson.

Power 50 member Andy Shape agrees.

“M&A activity definitely quieted down compared to prior years,” says Shape, Counselor’s 2023 Person of the Year and CEO of Top 40 distributor Stran & Co. (asi/337725), which has executed four acquisitions since becoming publicly traded in late 2021. “While there remains a robust pipeline of potential targets, the number of transactions appears to have meaningfully shrunk.”

The drop-off in promo M&A was part of a bigger trend.

20%
Decrease in the total value of global M&A deals in 2023 compared to 2022.(Bain & Co.)

Global M&A plummeted to its lowest level in a decade in 2023. Advisory firm Bain & Co. reports that the total value of mergers and acquisitions was down about 20% in 2023 compared to 2022. Meanwhile, PwC analysts say that global M&A deal values were approximately $2.5 trillion in 2023, only about half of what they were during the peak year of deal activity – 2021. Deal volume dropped too, slipping 17% from just over 65,000 deals in 2021 to around 55,000 deals in 2023, PwC notes.

“M&A has been less active throughout the business world, not only in promo,” says Power 50 member Marc Simon, CEO of Top 40 distributor HALO Branded Solutions (asi/356000), which has executed one of promo’s most aggressive acquisition strategies of the last decade-plus, having acquired multiple other Top 40 firms in that time.

“The combination,” continues Simon, “of higher interest rates … and value expectation differences have played a role in the reduced M&A activity.”

Factors that inhibited M&A broadly did so in the promotional products industry as well.

Take the interest rates Simon mentions. They soared last year, rising from 4% in May 2022 to 8.5% in July 2023, says Watson. That made the cost of borrowing cash to buy a company more expensive – and thus not as enticing a prospect.

Furthermore, heftier rates could have negatively impacted an acquiror’s existing business or the business they wanted to purchase if either were highly leveraged or carried debt, some executives point out. Investors also may have wanted to hold onto cash given that the risk-free rate of return, which is based on a 20-year Treasury yield, was nearly 5%.

“It’s the safest place an investor can invest his or her money,” says Watson. “The lower the risk-free rate is, the more motivated investors are to go out and find other places to make money, such as through acquisitions. The higher it is, the more likely investors are to sit and earn that rate with little risk.”

Companies across industries, including promo, also weren’t seeing eye to eye on the value of a business, which caused potential deals to stall, M&A analysts say. The most common breakdown? Sellers were asking prices that would-be buyers weren’t willing to pay.

“The combination of higher interest rates and value expectation differences have played a role in the reduced M&A activity.” Marc Simon, HALO (asi/356000)

Business valuation considerations also appear to have put the brakes on promo deals in a related way.

While distributors collectively increased sales in 2023, they did so by just 1.2%, and 41% of distributors experienced a decrease in revenue, according to ASI Research. What may have been a bumpy year for certain industry businesses kept some owners from putting their firms up for purchase because the companies were not worth as much as they could be after a robust year, industry executives say.

“Exit strategy sellers paused their search for a buyer to improve their balance sheets,” shares Power 50 member Jo-an Lantz, CEO/president of Geiger, which made two acquisitions last year and one so far in 2024. “Once their balance sheets show greater profitability, they will reenter the market to sell at an improved valuation.”

Economic uncertainty was another important factor in reducing M&A in promo and other industries. While U.S. gross domestic product accelerated 2.5% last year, inflation, high-profile layoffs in the technology sector, banking industry wobbles, and perpetual economic doom-soothing from economists and mass media were just some of the manifesters of ample anxiety in the marketplace.

“The frequent discussion of a possible recession created uneasiness in the industry, leading acquirors to be careful not to overextend themselves at a time when that uncertainty exists,” explains Shape.

Additionally, the Stran CEO says, some changes ushered in by the post-COVID era likely clamped dealmaking to a degree. The pandemic led to financial irregularities for some companies – both good and bad, he explains. As those anomalies, such as increased PPE sales, changes in product lines or shifts in customer base, started to normalize, Shape says it became clear “that some of the pandemic-driven changes may not be sustainable long-term” – which can affect valuation and interest by buyers in a firm.

A ‘Tipping Point’ Reached?

Of course, the hurdles to promo M&A haven’t simply disappeared at the start of 2024, but there are developments in play that have merch executives and acquisition authorities outside the industry believing dealmaking acceleration is imminent – even if the magnitude of the increase remains unclear.

“We are hearing the starting bell sounding for an upswing in M&A activity,” says Brian Levy, a partner and global deals industries leader at PwC U.S. “Whilst the strength and speed of the recovery remain uncertain due to lingering macroeconomic and geopolitical challenges, we believe we have reached a tipping point. We expect the M&A markets to embark on a new upward trajectory, with a steady increase in activity as the year progresses.” He notes the bounce-back has already begun in markets like energy, tech and pharmaceuticals.

2.1%
Forecasted annual U.S. GDP growth in 2024.(International Monetary Fund)

Levy and promo executives give similar reasons for why they think M&A will rise. Falling inflation, the Federal Reserve’s stated intention to lower interest rates this year, growing business confidence, and improved outlooks for global and domestic economic growth (a knock on effect of which could be strengthened promo sales and thus higher business valuations) could help create a market more conducive to doing deals.

“I believe there will be an increase in M&A activity as the tempo of business picks up and as interest rates moderate,” states Simon.

Pent-up demand following 2023’s dealmaking drop and the need for companies in promo and beyond to adapt in order to grow could also help advance acquisition activity.

“Geiger’s pipeline of M&A opportunities is filling at an increased pace,” says Lantz. “We have seen an increase in deal discussions in North America, as well as in the United Kingdom/Europe. The firms we’re speaking with usually are seeking a partner that can help them compete and win contracts with very large companies. Their motivation is to find a growth partner.”

To that point, Watson says promo has a strong force of strategic buyers – including firms like Geiger, HPG, HALO and Stran. “That means there is significant upside in the economies of scale and synergies that exist in a strategic purchase” – both for the seller and the buyer, says Watson. She thinks “we’re likely to see more acquisitions in 2024 between buyers and sellers who know how to think outside the box and find solutions in today’s market.”

One such unique solution is seller financing, which involves a business seller providing a loan to the purchaser. “With this, the seller can override the hurdle of interest rates and incent buyers to make acquisitions,” Watson says. “This flexibility provides sellers with the opportunity to sell their businesses when the time is right for them, even in the midst of economic uncertainty.”

“Geiger’s pipeline of M&A opportunities is filling at an increased pace. We have seen an increase in deal discussions.” Jo-an Lantz, Geiger (asi/202900)

The increase in private equity ownership of promo firms could also help spark deals, especially if interest rates decelerate. In general, PE firms see promo as a market that’s ripe for consolidation. This leads some PE companies to acquire a high-performing industry business and then help that firm make acquisitions of other quality companies in the market. HPG and HALO are PE-backed, for instance.

Like Geiger, HALO, HPG and Stran are engaged in activities that could lead to more acquisitions. Executives didn’t want to discuss particulars of any possible in-the-works deals, but they share that the potential for fresh business-buying is alive.

“We are still an active acquiror and are constantly in discussions with potential targets – but want to make sure they’re the right targets that fit with our long-term strategy and cultural makeup,” says Shape.

Shares Simon: “Based on the entrepreneurial nature of many industry business owners, we see continued opportunity for successful acquisitions with industry distributor companies.”

HPG’s five-year plan calls for continued organic growth, complemented by strategic acquisitions of hard-goods suppliers “regardless of what happens with interest rates and the public markets,” Anderson states. “We have earned the reputation of being the buyer of choice for promotional suppliers, and my expectation is that we will further cement this reputation in the coming years.”

Speaking of M&A across markets, Levy says an increase in deals in 2024 will likely be more measured than the huge swell seen in 2021. Nonetheless, he advises buyers and sellers to be ready.

“Don’t let this M&A upturn take you by surprise,” Levy says. “It’s coming, and when it does, it won’t be like ones we have seen in the past. Deal returns will be under greater pressure, and the companies that ultimately come out on top will be those that can demonstrate strategic value, are well prepared and can move fast.”