What is the new normal in M&A?
My entire professional life I have been working with M&A and financing. Much of what I have learned over time is still accurate and useful but over time there have been numerous changes and especially in market practice. In times of turbulence, said changes are usually fast and create confusion and delays. It is basic psychology that people are reluctant to change – and this also goes for the M&A market.
We have witnessed significant turbulence. First COVID with lock downs, significantly changing consumer behavior, lack of components and huge financial aid packages pouring into the markets. When we finally learned to live with the then new normal, we faced new challenges in the form of war, shortage in energy supply, inflation, and logically increased interest rates.
The M&A market did not take significant hits during COVID. On the contrary, we saw valuations going up with multiples no longer reflecting the underlying economics other than through the shift in supply of financial resources. Interest rates were record low further boosting investment activities.
Once again, we find ourselves in a completely new situation. There is great uncertainty in the market and interest rates keep climbing reducing the supply of leverage. Creditors have tightened the financial covenants further restraining M&A activities. Cashflow positive business is the new king and the ever-loss-making growth platforms have lost their glamour. On the positive side, equity investors have a huge amount of dry powder to be deployed and any time of great turmoil is a possibility. Most vintages following global crises show the best returns on investment.
The valuations we have seen in the recent years are now part of the history books. We are back to pre-COVID levels. This is the new normal. There are many well-run companies in the market who are fully eligible for financing and who can tap into the post-turmoil opportunities by actively utilizing M&A and raising financing.
What we all need to first realize and then accept is the new normal in valuation. If you keep living in the past, you will not get your company funded or sold. “Mind the gap” works here as well. One might also wait and see – but do you want to speculate what the new normal is tomorrow?
Being a legal advisor, any new normal requires creativity and good co-operation among the advisors to close the deals. Happy to utilize our vast experience in co-operating outside the box!
