Inflation, labor crisis, corona, war, energy crisis, interest rate hikes. The recent period has been characterized by crisis upon crisis upon crisis. The old adage "confidence comes on foot and goes on horseback" appears to have come true again since the beginning of this year.
Does this doomsday scenario also apply to the takeover market? Are fewer deals, reticence on the part of buyers and sellers, less interest on the part of investors and, above all, lower valuations and acquisition prices.
Takeovers and succession
Not yet, it seems. Especially in SMEs and family businesses, other factors play an important role. One of them is the succession problems of older entrepreneurs in particular. This so-called post-war generation feels the need to sell quite a bit, especially since natural succession from the family has not been a given for a long time.
In addition, the corona crisis put sales plans on hold in the early days, but what record year 2021 already showed was only short-lived.
Also, in recent years, investment companies have raised huge amounts of capital from institutional investors, high net worth individuals and others (partly due to low interest rates), and this money needs a return.
The labor crisis is also amplifying things at the moment. Scaling up and buy-and-build have been magic words in the merger and acquisition market for years, but now acquisitions are also proving to be a useful tool for recruiting new staff.
Funding
We do see major differences in sectors where the risk profile of a company is also changing faster. Old values such as "the food sector is much less sensitive to the business cycle" are now also proving incorrect due to rapidly rising raw material and energy costs. So there are major sectoral differences that are themselves subject to change.
Are there no negative effects of macroeconomic conditions at all? Of course there are.
One important issue is the willingness of banks to finance acquisitions. By the way, this is not something that started only this year, but has actually been going on since 2020, the beginning of the corona crisis. By the way, it is not always just the unwillingness of banks to take on (in their eyes) risky financing, but it is also often driven by the increasing laws and regulations that have caused banks to sometimes have little room to finance at all.
This gap could be largely filled in recent years by new forms of financing and investment companies, but with rising interest rates and inflation, the question is whether these parties will be able to realize their funding as easily in the future.
Risk profile
Rising energy and commodity prices, high inflation and tight labor markets could also throw a spanner in the works. This can put strong pressure on the profits of the intended buyers, making investments (e.g. acquisitions) more difficult to realize.
Overall confidence also plays an important role in acquisitions and thus the risk profile of a company mentioned above. The more uncertainty, the higher the buyer assesses a company's risk profile. This immediately translates to one of the most important tension factors in any acquisition: the valuation (and consequently) the acquisition price of a company.
The big drop in valuations among SaaS and (some) tech businesses in the first half of 2022 has not yet been mirrored in the more traditional market segments such as construction and food. This is partly because valuations here are already a lot lower and tech businesses are largely valued on future growth scenarios. No one can deny that the future has become uncertain over time so the risk profile for such businesses is higher.
Opportunities
In conclusion, the takeover market is far from closed. A Brookz survey of just under 300 acquisition advisors shows that a majority do see the market deteriorating in the coming period, but that is relative to the record year of 2021.
The availability of financing is cited as the main cause. But at the same time, the takeover market offers great opportunities for many parties, even in a declining market!
