The end of 2022 marks the time for every man for himself on both sides of the Atlantic.
- The massive subsidies decided by the American president in a major economic and social law called the Inflation Reduction Act (IRA) will boost American industry, particularly the electric vehicle sector, with a view to reviving industrial employment, the energy transition and technological competition with China.
- The German 200 billion plan to cap energy prices and relieve German consumers from galloping inflation creates a huge distortion in terms of competition within the European Union.
In this context, M&A deals will be much more difficult to build and finance, both in equity and debt, in 2023:
- It will be more difficult to justify M&A deals to boards of directors: Discounted Cash Flows will no longer be able to rise to infinity, terminal values will seem uncertain, the cost of capital will increase when risk-free rates rise on the basis of central bank rate hikes and risks explode, especially in emerging countries.
- It will be necessary to justify enlightened catastrophism and model disaster scenarios rather than constructing ever more optimistic scenarios.
- Valuation multiples, which grew steadily between the end of 2010 and 2021, are being revised downwards as a result of the fall in share prices, the primary source of comparables.
- CLOs (collateralized loan obligations) are closing. Banks, under the watchful eye of central banks, must keep them on their balance sheet and will therefore be more cautious in a more uncertain EMP context. Banks will not be able to take the same risks in 2023 as before.
- IPOs (Initial Public Offerings) are much rarer, made more problematic by the volatility of financial markets.
- Private equity is suffering from the decline in tech stocks and is being more cautious.
In addition, mergers and acquisitions will be more difficult to execute in 2023:
- Competition authorities are hardening their positions on both sides of the Atlantic, through nationalistic spectacles. It is the reign of the here and now as illustrated by the rejection of the M6/TF1 merger.
- Operations are also blocked by states in the protection of sovereignty.
- Finally, for listed companies, the financial markets have to be convinced over a much longer period of time, which is necessary to get the green light from the authorities (10/18 months). During this long period, the volatility of the markets can upset merger parities, making the financial situation of each party very different from what it was at the time of the announcement of the operation, thus increasing the risk of abortion of the operations.
This context outlines the major trends in mergers and acquisitions over the next three years:
- Corporate restructuring is making a comeback, with more companies in difficulty due to the explosion in energy, raw material, transport and salary costs and sales price increases made difficult by a lack of pricing power. A perfect storm that will weaken many companies.
- American buyers are coming back in force, boosted by the strength of the dollar, the cost of energy (currently 1/4 of the cost of energy in Europe, a gap that will widen in Europe), and the control of American inflation, whereas European inflation is exogenous (insensitive to interest rate increases).
- This context tends to favour private equity players thanks to the scarcity of financing. Even if the closure of CLOs is not good news, investment funds have a very efficient, highly reactive form of management, free from public opinion (unlisted), under the radar of the authorities. This is a competitive advantage that compensates for the reduction in leverage.
- External growth operations will concentrate on small and medium-sized companies. This is the end for a while of large LBOs (leverage buy outs) / large cross-border deals.
In the next 3 years, M&A transactions will focus on small and medium-sized deals, which are easier to finance and execute.
Comco Consulting will assist you in your M&A transactions of small and medium sized companies. Please contact us to find out more about our support offer at contact@comco-consulting.com.