This is how M&A professionals reduce risks in 2024

How will M&A professionals reduce M&A risks over the next twelve months? No fewer than 39 percent are committed to more selective targeting. This is evident from the Dutch M&A Trend Survey 2024 by M&A and Ansarada.

This is the top 3 measures through which M&A professionals plan to reduce risk in the coming twelve months:
1. More selective targeting
2. Beter pre-deal preparation
3. Stricter financial terms

“We now look more critically at predictive indicators, which gives you a clear picture of what is needed to help that company take a step further”, says Ida Kuijken of growth investor Fortino Capital. “We are quite data-driven: we not only use historical data, but also forward-looking metrics. We want to understand what the unit economics are at a company’s early stage. We want to invest in growth, but we want the product and the company to already be in place: it must be clear what we are investing in. That ties into my number 2, ‘improving integration planning and execution excellence’. We aim for operational excellence: it sounds nice to conquer a new country or organize sales and marketing differently, but how do you really do that, do you have a plan for it and the right people on board?”

“I think it’s a combination of more selective targeting and also more extensive preparation or due diligence”, says Jan-Hendrik Horsmeier, Partner at law firm Clifford Chance. “These other elements are more like band-aids. You can ask for more guarantees or look for conditions, but if the underlying asset is simply not good enough, the deal will not survive.”

Improving pre-deal and integration plans also scores highly within the M&A Community at eighteen percent. Peter Toutenhoofd, Head of M&A Advisory Netherlands at BNP Paribas: “Improving integration plans will be very important for corporates. Take a good look at whether the synergies can be made tangible. I also see insurance to remove uncertainties. W&I insurance has now become a standard in every transaction.”

Confidence in the future

The biggest challenge in completing an M&A deal is again the valuation gap at 27 percent, followed by the availability of capital (25%). Economic recession (22%) comes in third place.

The biggest challenges in completing an M&A transaction over the next 12 months – From important to less important:
1. Gap in buyer and seller valuations
2. Availability of capital
3. Economic recession
4. Availability of targets
5. More extensive due diligence phase
6. ESG compliance
7. Political instability
8. Issues with competition authorities
9. Protectionist policies / trade conflicts

The first two challenges lead to more creative solutions in the financing sphere, according to several M&A lawyers we spoke to for this research. “You have always seen vendor loans, but we now also see other instruments returning, such as convertible loan notes”, says Daphne Bens of law firm DLA Piper. “Asset-based financing is also emerging in addition to regular leveraged finance. And we are seeing asset deals more often. More creative thinking is needed to bring buyer and seller together.”

“I think economic recession is the first because it has an impact on confidence. The M&A market is built on confidence in the future”, says Sergio Herrera of Rabobank. According to Johan Verlinden of global pharmaceutical compounding company Fagron, whether or not there will be a crisis is always the biggest challenge when completing an M&A deal. Valuations then become very difficult. And that for three or five years. “To be clear, I would like to say that I remain optimistic about the M&A market over the next twelve months. Optimistic and opportunistic, because the two are inextricably linked in our industry.”

Concerns about geopolitical developments are also on the radar of M&A experts. “The threat of more war has a huge impact on the market,” says Peter Toutenhoofd of BNP Paribas. “Bombing the ports of Ukraine has a huge after-effect. You see that support is being questioned in a number of Eastern European countries. Yes, that makes it exciting.”

Lesley van Zutphen, Managing Partner of private equity firm of Bencis Capital Partners also sees increasing geopolitical instability as an uncertain factor. “Suppose Donald Trump wins the election, makes a pact with Putin and leaves NATO. Or the Chinese invade Taiwan. Or the Russians use tactical nuclear weapons on the Ukrainian battlefield… Such scenarios could turn markets upside down worldwide. These were uncertain times and that will probably not be very different in the coming twelve months and probably years.”

However, even in the darkest scenarios, there will still be work for M&A professionals. “Parties have to sell, because they want to be successful”, concludes Ewald van Hamersveld, private equity partner at KPMG. “The cycle must be kept going. And the buyer wants to grow further through buy & build. That has always been the case and will not change – despite high interest rates, inflation, geopolitical unrest.”

Read also: Dealmakers expect an increase in deal volume in 2024