Saving Corporate M&A (Part 1) - Trend of Trends
And why opportunistic M&A, isn't
Observe this graph below carefully.
Source: IMAA Institute
Note, how M&A deal value and volumes ebb & flow. Note the peak years - 2000, 2007, 2015 and 2021. In these years, both deal values and volumes peaked. Note the behaviour in the low years also - 2002, 2013, 2020 and 2023.
Outside of seasoned acquirers, most companies and CXOs like to take, what they describe as an “opportunistic” approach to M&A. This is essentially saying that they will do M&A only when the prices are low. To those who espouse such a stance, it sounds like a perfect adaption of value investing principles to M&A and therefore a sound stance to take. But, reality is quite different.
Consider these two graphs below -
Source: Bain Global M&A Report 2024
Source: IMAA Institute
Deal multiples were at peak in 2021 and so was M&A deal count and when M&A did get cheaper in in 2023, as seen by drop in the EV/EBITDA deal multiples, so did M&A deal count itself. M&A involves probabilities - you don’t get to win every time you place a bid and therefore to maximise your chances of doing M&A, you have to place many bids. In a slow M&A market, the paucity of deals ifself limits success, even if the deals are available at lower multiples. This is the quantity problem in M&A - for all the discipline and value investing muscle that one may have built up, it will all amount to nothing, if you do not or cannot do any M&A.
But, lets get a bit deeper into what was hampering M&A in 2023. Consider these two snippets from the Bain report -
Good quality assets don’t sell for cheap, regardless of market conditions. For those who want to steer clear of bubbly or exuberant M&A environments, do also note, you are lowering your chances of encountering good quality assets to buy, when you decide to “opportunistically” fish around. This is the quality problem in M&A.
M&A is hard and opportunity costs hit hard if you keep spending time, effort and money in M&A processes but don’t close any acquisitions. Not to speak of what this means for your organization’s strategic progress or competitiveness/relevance in the market.
While yes, you should want to acquire high quality businesses at prices that attractive to you and help your organization advance on its strategic goals, but if your own actions keep you away from such outcomes, what good is your approach. Being opportunistic with M&A is just that self sabotaging approach, that should be discarded. M&A is for all seasons and especially the high seasons.
Stay tuned for more parts, as the Doge shows you the right way to M&A.