M&A OVERVIEW: CURRENT STATE OF THE MARKET 2023 is set to be a busy year for SaaS M&A, with many investors viewing the past 12 months as nothing more than a cooling-off period after a decade of strong growth. The expected return to normalization in the labor market following a period of cost optimizations, coupled with the prospect of lower interest rates towards year-end all point to an uptick trend in growth and in turn, M&A activity. Challenging that timeline is the continued pressure applied by the Fed, signaling in December 2022 that interest rates may have to rise above 5% to start to tame inflation back to the 2% target level, which is impacted by factors both in and outside of the U.S. Namely, the Great Resignation, the invasion of Ukraine and the impact on commodities have all played a role in keeping inflation higher than anticipated and elevated for longer than expected. Privately held SaaS businesses have weathered the storm well, with most able to absorb increased labor and software costs through their typically high margins and operational flexibility. This cannot necessarily be said for public SaaS companies and in some cases, VC-backed companies, as their financials often run at low (or negative) margins to fuel growth, meaning an increase in interest rates impacts their ability to invest to scale. This has created a correction for many high-growth, low-profit tech companies. Whereas SaaS businesses with high net dollar retention (or low or net negative churn) and strong free cash flows (FCF) have outperformed and are increasingly being targeted by suitors seeking both strategic value and bottom-line growth. All signs point to a high volume of M&A activity in 2023. Capital earmarked for M&A remains near record highs and investors are increasingly active in their pursuit of value-oriented acquisitions. FE INTERNATIONAL PAGE 01