Fear and money: two key, underlying drivers behind many business decisions.
This is especially true in the area of mergers and acquisitions where those two basic principles influence the market more than anything else. At times of uncertainty the pendulum swings away from money as the main decision criteria. This is also closely reflected in the market at the moment.
The speed with which deals are being closed has come nearly to a complete halt in the last 6 months and even those deals going through are of significantly lower volume. In the last years Wholesale Distribution was one of the top industry segments as it relates to Mergers & acquisitions in sheer numbers even though not in size.
A lot of those deals were done by companies trying to outgrow competitors, expanding vertically or even actively driven by the seller to find a solution to their looming succession question.
Even though the capital required to finance those acquisitions is now harder to secure, a lot of our customers are in a financial situation which enables them to obtain credit fairly easily, but still it seems everybody is holding their breath to see what is coming next.
Critics and supporters of M&A in these times have good reason for their point of view.
Arguments in favor of M&A
- Private equity firms are currently holding back which keeps the prices at more realistic levels. This makes it easier for established corporations to bid for businesses.
- With the global market adjusting asset prices downward to a more realistic level you can make great deals for less cash.
- As there is less competition out there currently, you have more time for due diligence to go through with a 360° check of your acquisition target.
- Now is the time to get ready for a recovering economy. Multiple small deals in strategic areas are easier to finance, faster to integrate and will allow you to serve as a springboard.
Main risks for M&A:
- Securing credit is much harder to do as paranoia in the banking system is causing them to redefine their credit approval criteria on an on-going basis. You will have twice the drama when thinking about refinancing.
- Cash is King as you don’t know what is around the next corner. This is a solid risk avoidance strategy.
- Deals in progress are being stretched out and it is challenging to complete them in a timely manner
When thinking about strategic M&A, which decision criteria is driving your business currently… The carrot or the stick?