As companies seek to position themselves for long-term success and growth, M&A will likely remain a key strategy for achieving these goals
Mergers and acquisitions have been a crucial aspect of several businesses’ growth strategies for decades. During periods of economic turmoil, executives are hesitant to engage in M&A transactions, preferring to wait out the storm. However, history shows that the most successful companies take advantage of the opportunities presented by economic downturns to reshape their industries. Savvy executives keep their feet on the accelerator, even as competitors slam on the brakes in the face of turbulence.
Consulting giant Bain & Company’s research on M&A in times of turbulence reveals that the companies that execute at least one deal per year during an economic downturn earn 120 basis points more in total shareholder returns than companies that are inactive in M&A. Therefore, it’s essential to keep an eye on the trends and plan M&A deals during turbulent times.
Cash-rich companies making strategic, bold moves
Companies with a strong market position, cash on hand, and debt capacity will have the upper hand to execute transactions. These companies should confirm their strategic M&A roadmaps, revisit deal models, and lay the groundwork to move quickly on desirable targets (large and small). Many sectors have cash-rich market leaders, including energy, industrials, and technology. Strong performing companies with an experienced track record of M&A will be the best positioned to do the largest transformational deals.
Thousands of deals valued at less than $500 million make up the bulk of M&A activity each year. Small to midsize deals will be easier than megadeals to complete given relatively lower risk, less reliance on financing, and less regulatory scrutiny. Dealmakers in many industries may shy away from pursuing deals that could wind up in regulatory crosshairs as extended pre-close periods incur many direct and indirect costs. Sectors with struggling assets, such as banking in Europe and telcos in developing economies, may find more tolerance among regulators for large consolidation deals.
A high-interest-rate environment and weak economy put a premium on assets with cash flow and a line of sight to rapid synergies, supporting a near-term shift to scale deals. However, appetite will continue for deals to build and grow new businesses. These “Engine 2” deals offer speed to market and efficiency that organic moves can’t match. Energy companies are likely to be a prime example of this approach as they use cash to consolidate in existing markets while shifting to renewables via scope deals. Similarly, in retail, while retailers pursue scale deals, they are also likely to use scope M&A to establish “beyond trading” Engine 2 businesses.
Uncertainty regarding cost and availability of capital, as well as the overall macroeconomic outlook, will likely cause dealmakers to be more conservative in valuations. History suggests that valuations typically find a floor at some point during a downturn. To improve their chances of success, executives should ensure that their deal models incorporate a range of downside scenarios to help evaluate bids’ robustness. Deal teams should also establish a regular cadence of valuing assets and stress testing their underlying assumptions to prepare themselves for any market volatility.
M&A can provide many benefits during economic downturns, including the ability to reposition for future growth, fill capability gaps, and expand into new markets. Companies that move quickly when others hesitate are rewarded. Through the global financial crisis of 2008–2009, many industry-defining deals were made, positioning acquirers for faster, more profitable growth out of the downturn.
Deal practitioners are prepared to take advantage of this moment, as evidenced by the M&A Practitioners’ 2023 Outlook Survey.
According to the survey, M&A practitioners are optimistic about the M&A market’s future, with 81% of respondents expecting deal volume to increase in 2023. The survey also found that technology and healthcare are expected to be the top sectors for M&A activity in the coming year.
In addition, the survey revealed that the use of alternative deal structures, such as joint ventures, partnerships, and minority investments, is expected to continue to grow in popularity in 2023. This trend reflects the desire of companies to pursue growth opportunities while mitigating risk and preserving capital.
However, the survey also identified several challenges that could potentially impact M&A activity in 2023. One of the primary concerns was the potential for global economic and political instability, particularly with regards to the ongoing trade tensions between the United States and China. Other challenges cited included increased regulatory scrutiny and geopolitical risks.
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