Strong M&A activity will continue through year’s end even if the Federal Reserve takes anti-inflation measures and capital markets cool, predicts M&A Leadership Council Chairman and CEO Mark Herndon.
McKinsey and Co. M&A practice leader Jeff Rudnicki is also expecting inflation not to be a dampener.
Post-pandemic winners are likely to be companies with strong balance sheets and an experienced M&A team with the ability to rapidly escalate serial acquisitions and deal volume over and above their historical annual deal counts, Herndon says.
But even for well-positioned companies, the landscape will be different, in part because of the strong capital position of so many companies and the hunt for mergers by private equity firms and special purpose acquisition companies (SPACs).
“Driving that kind of serial acquisition success is a completely different ballgame for most corporate acquirers,” he says.
Buyers need to act fast and ratchet their diligence down to the critical items to make a go/no-go decision, then insist on solid reps, warranties, escrows and earn-outs, he says.
Then, immediately prior to or just after close, Herndon says, buyers must introduce a more structured integration discovery process to cover the bases that couldn’t be covered in a more traditional due diligence pre-definitive agreement.
“The integration can’t be the normal, customary approach,” he says.
New market entrants
One surprise this year has been a substantial number of “net, new acquirers” entering the market, Herndon says.
“We directly observed companies from approximately $150 million in revenue to established, best-in-class name brands with well over $3 billion in revenue declare 'now is the time' to start an inorganic growth campaign,” he says. “In some cases, these companies had never acquired before. In others, it had been several years since their most recent acquisition.”
In these latter cases, the executive leadership team had turned over and much of the institutional knowledge was lost, says Herndon.
Washington tax talk
The tax changes under discussion by the Biden administration and Congress, including changes in capital gains, are part of the background dialogue that’s driving companies' strategies, says McKinsey’s Rudnicki.
“Both buyers and sellers are trying to understand the range of outcomes based on possible tax changes and its implication on valuation,” he says.
For many companies, a big part of the conversation is distressed assets; M&A specialists are evaluating companies struggling post-pandemic to determine if the underlying business is still strong and the market is undervaluing its worth.
“The financial effects of the pandemic are making potential buyers bring more precision to their financial models over the next couple of years to understand which pandemic effects are temporary and which are lasting,” Rudnicki says.
Cheap money, digitization
Overarching themes in the M&A resurgence include access to low-cost capital, a projected macroeconomic recovery and companies’ migration to business digitization, according to a report from BDO Capital Advisors.
“Digitization of the economy in the post-pandemic era has fueled the adoption of advanced technologies and cloud-based platforms, triggering the demand for outsourced IT and specialty consulting services to address the rise in data backup, data security and system upgrades,” the report says.