An insight into the M&A market.
Well it’s safe to say that the M&A frenzy continues at pace.
And despite the carnage in global supply chains, rising inflation and scarcity of talent, most observers are confidently predicting that this bull market has life in it yet.
Watch the mergers & acquisitions trends update for Q4 from Tristan Rice, Partner:
Renowned bellwether, Sir Martin Sorrell, expects a correction in 2023, especially for companies with more traditional business models, but he’s betting that digital and tech-enabled companies will continue to grow, albeit perhaps at a slower pace – and that view is clearly expressed in S4 Capital’s ongoing acquisition spree.
There’s still no shortage of motivated buyers and sellers in the market, but a growing problem for dealmakers is that – not unlike elsewhere in the economy – the infrastructure that supports M&A is creaking under the strain of intense demand.
Global M&A fees for the first 9 months of 2021 exceeded $100bn – the highest level since records began.
Little wonder then that the accountants, lawyers and regulatory authorities required to get deals done, are struggling to cope with the workload, and some transactions are taking a bit longer than everyone would like.
Private Equity continues to provide most of the fuel for the current heat in the market – both through platform investments and subsequent buy & build strategies.
The epicentre of demand is in tech or tech-enabled companies that have demonstrated the ability to grow faster, more profitably and more sustainably than purely talent-based companies that sell ideas and time. This is where the real premiums, the revenue multiples and bidding wars are to be found.
But we’re also seeing plenty of demand for a wide range of consultancies and agencies that have a specialised or differentiated offer; contemporary clients; and the strong revenue growth that tends to result from those key attributes.
As to how deals are being structured, the trend toward faster integration continues, and that means that earn-outs are getting shorter. With longer deals, it’s relatively easy to offer a high headline multiple – buyers just make the realisation of the full price contingent on delivering growth over 3, 4 even 5 years.
But in a market where sellers are able to command a premium, the implication of shorter deals is that buyers are taking on more risk by paying full value over a shorter time period.
So listed and PE-backed firms are often paying a portion of the value in equity, keeping founders locked in and incentivised over the longer term, to offset some of this risk. All very sensible. But in order for that to work, you need a convincing equity story. Buyers that bake too much of the future value growth into their current share price will find that sellers don’t place much value on illiquid stock with no obvious upside and over which they have no control.
But overall, sellers seem pretty willing to transact – perhaps sensing that the next opportunity might not be for several years and could be in a very different tax environment. So expect deal announcements to come thick and fast over the next few months.
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