Avoid pausing M&A in a downturn

Businesses often respond to volatile markets and downturns with hesitation. Convention suggests that it’s too risky to do deals when the economic outlook is uncertain and financing is harder, and this is reflected in M&A deal volumes; An economic downturn generally leads to a drop in deals. But the data tells a different story.

Volatility doesn’t have to be a threat. In fact, it’s often a signal.

Looking at the winners and losers from previous recessions reveals that consistent M&A activity through all economic cycles generates the highest returns. Companies that were active acquirers before the global financial crisis in 2008 performed best by staying active during the recession, according to research by Bain.

These companies earned an average shareholder return of 6.1% during the decade from 2007, compared to a return of 3.8% for companies that were active pre-recession but moved to the sidelines during the crisis. The gap is even bigger when comparing companies that were inactive in M&A generally.

PwC found a similar effect on returns during the collapse of the dot.com bubble. Just one year later, companies that had completed acquisitions during the recession in 2001 out-performed the overall sector by double digits.

Why consistent M&A works

There are several factors that may help to explain these research findings.

• Valuation gaps create opportunity. Market pressure leads to mismatches in valuation expectations. Volatility drives down valuations, especially for businesses under short-term stress. Buyers with capital, courage, and a long-term view can acquire high-quality companies at a discount. The valuation of such assets typically bounces back quickly after a recession.

• Strategic repositioning accelerates. Volatile periods spark clarity. Companies reassess their focus, leading to more carve-outs and divestitures. Acquirers act quickly to secure bolt-ons or transformative deals to strengthen their core. In doing so, they reshape their business models faster than competitors.

• Confidence. Practice makes perfect when it comes to M&A. The types of companies that have the confidence to continue closing deals during a downturn tend to be those that have the most experience. By building M&A as a core competency within the organisation, they have the expertise to execute deals throughout the economic cycle — and they are more likely to make such deals work.

• Capital. Access to capital is obviously a key factor in being able to continue making acquisitions. Companies with a proven track record of successfully generating value through M&A will find it easier to finance deals in a recession, when companies with a lesser track record may struggle.

• Cost savings. M&A can always lead to lower costs, but during a recession this effect may be amplified as competitors who sit on the sidelines struggle to find the same savings. Needless to say, lower costs result in higher profits.

All of these factors can help serial acquirers to jump ahead of the competition and gain an advantage in terms of market share or strategic position, which can quickly result in higher profit growth when the economy bounces back.  Richelle Ros, partner at Kruger Corporate Finance noticed an increase in distressed situations during the energy crisis throughout 2022 and in 2023. “Increasingly, we saw over-indebted companies whose interest and repayment obligations could no longer be met by the operation and bankruptcy was imminent.” According to Richelle, distressed M&A could not only be a solution for the continuity of operations or activities of a company but could also have high value for the acquirer because of the possible discount to ‘market value’.

M&A is a tool, not the goal

The key to earning these higher returns is to use M&A as a tool to achieve strategic objectives. Being an active deal-maker isn’t the end goal. Acquisitions can be used to add technologies or skills, to expand into new markets or sectors, or to achieve any other corporate objectives. The point is that companies can achieve their objectives faster and more efficiently than their competitors by regularly exercising their M&A muscle.

Consistent acquirers are also more successful at making deals work, which means they’re better placed to take advantage of the opportunities that arise during downturns. Indeed, Bain’s research shows that the worst-performing M&A deals are those involving infrequent acquirers. Research by McKinsey shows that companies pursuing M&A during downturns consistently outperform peers, with through-cycle dealmaking proving more resilient and value-generating than reactive strategies.

Dealsuite enables a consistent and strategic approach to M&A

Volatility doesn’t slow down M&A; It changes it’s shape. While some pull back, others lean in. For bold acquirers and strategic sellers, volatility isn’t a threat. It’s timing in motion.

Dealsuite facilitates a consistent approach to M&A by greatly improving your ability to source deals and by directly connecting M&A professionals who know how to get deals over the finish line.

As a cross-border platform, Dealsuite also enables another recession-busting quality of M&A: diversification. Economic downturns affect different countries to different degrees. By spreading risk across a bigger geographic footprint, companies can achieve a more balanced portfolio and lower their overall risk.

Contact us at Dealsuite to help you find the perfect deal in these uncertain economic times.