Global M&A market remains active

The record global M&A hunt continues despite high inflation and the threat of recession, according to the half-year report on the global M&A market by consulting firm Bain & Company. There are signs that transaction volumes this year could reach $4.7 trillion, the second-highest level since the turn of the century, the report said. Only in the exceptional year of 2021 was it higher, at $5.9 trillion. The report not only analyzes recent developments in the M&A market. It also shows how company buyers can use acquisitions to gain a competitive edge even in turbulent times.

M&A market: solid balance sheets and high cash flow inflows boost willingness to buy

"In recent years, low interest rates have further fueled the M&A boom," explains Bain partner Dr. Tobias Umbeck. "With the central banks' turnaround on interest rates, first in the U.S. and now in Europe, the era of cheap money is coming to an end." This would currently affect financial investors more than strategic buyers, as in many cases the latter would have solid balance sheets and high cash flow inflows. Therefore, they would continue to have access to debt capital. "Leading companies will continue to make acquisitions in the future, because this will provide them with urgently needed skills," says Umbeck.

The focus here is on technology companies. Their share of the total transaction volume of strategic buyers has recently increased significantly. Bain partner and market observer Tobias Hürlimann notes: "The Corona pandemic has once again accelerated digitization in many industries. As companies are often unable to build up the necessary capacities quickly enough, they are buying in suitable specialists."

EBITDA multiple rises significantly

Russia's attack on Ukraine, with its consequences for the economy and inflation, has done little to change this. It is true that the transaction volume of strategic buyers fell from USD 970 billion in the fourth quarter of 2021 to USD 599 billion in the first three months of 2022. But the comparable prior-year level is likely to have been exceeded as early as the second quarter - especially as valuations are picking up significantly. While the average EBITDA multiple worldwide was still 11.0 in the first quarter of 2022, it rose to 16.7 in the spring. In 2021, this figure had been 15.4 across all four quarters.

"In view of such fluctuations and the general economic uncertainty, it seems understandable if companies hold back for the time being," says Hürlimann. "However, it would be unwise, because it is precisely in volatile times that markets are redistributed." Those who continue to invest during this phase have the opportunity to make their mark on their own industry for years to come and earn above-average returns, he adds. According to a Bain analysis of around 3,900 companies from all sectors worldwide, the winners of a recession increase their EBIT by an average of 14 percent in the 13 years following the recession. In contrast, losers struggle with stagnation in this regard. "Acquisitions make it easier to get on the winning side," says Hürlimann.

Meticulous preparation is essential

However, successful M&A transactions in a challenging environment require particularly thorough preparation. In Bain's experience, a stress test helps to reduce risks in the long term. At present, the focus should be on five topics:

• Net present value. Future cash flow inflows have a decisive influence on the purchase price. The longer the impending recession lasts, the lower they could be.
• Availability of capital. Restrictions on international capital movements, national regulations and demographic change could make it more difficult to raise outside capital in the future.
• Inflation. If companies cannot pass on their costs to their customers, margins fall - a decisive factor for valuation.
• Scope versus scale. In the crisis, the consolidation of individual sectors could accelerate. In the long term, however, the focus should remain on acquiring additional competencies to cope with disruptive change.
• Deglobalization. In view of geopolitical tensions, acquisitions in one's own region are gaining in importance.

Bain partner Umbeck recommends that corporate buyers review their valuation and integration models with regard to these five issues and take appropriate action. The M&A strategy must be adjusted, as must the list of potential target companies. It is also important to talk to banks about future financing conditions. "Turbulent times often offer the best opportunities for acquisitions," emphasizes Umbeck. "The faster companies adapt to the new conditions, the greater their chances of gaining a lasting competitive edge."

Source and further information: Bain & Company