Companies that remain active in M&A in turbulent times create more value.
In Bain & Company's sixth Global M&A Report, the consultancy company looks, among other things, at how experienced strategic buyers managed to gain a lead in 2023.
In 2023, the total M&A market fell by 15 percent to 3.2 trillion dollars, the lowest level in a decade. In the world of strategic mergers and acquisitions, more than 27,000 deals continued to be announced, totaling approximately 2.4 trillion dollars. This represented a six percent decline in value compared to the previous year.
Private equity and venture capital firms had a much worse time than strategic buyers (down 37 percent in value). That's because these investors were more exposed to the rise in interest rates and faced the reduced availability of debt financing. Corporate buyers generally had stronger balance sheets and plenty of cash on hand to make deals.
The number of strategic mergers and acquisitions declined because buyers and sellers struggled to close the gap in valuations. Multiples paid for strategic deals were the lowest in a decade.
Deals were postponed for a variety of reasons, including high interest rates, mixed macroeconomic signals, stricter regulators and geopolitical risks. However, many long-term frequent buyers used 2023 as an opportunity to expand their competitive advantage through mergers and acquisitions.
Who were the 2023 winners?
According to Bain's report, winning companies across industries and around the world entered into deals to reinvent their futures. Whether it is car manufacturers making vertical acquisitions to secure supplies for the transition to electric vehicles, insurers doing deals to expand their traditional role of risk protection into risk prevention, or media companies learning that collaboration with former competitors is the only way to win as the industry enters a new era.
The companies that have taken such steps will be the ones to emerge as leaders, says Bain & Company. The consultant continues: 'Perhaps the most important M&A insight from 2023 was the widening of the performance gap between frequent buyers and their inactive peers. According to our long-term research, frequent acquirers always outperform in terms of total shareholder return. That margin continued to grow in 2023.’
The year 2023 showed us once again that the gap widened between how frequent buyers and their inactive peers behave in down cycles of mergers and acquisitions, according to Bain & Company. The frequent buyers perform better in all economic cycles and tend to stay in the market through good and bad times. ‘For example, if we look back at the Covid-19 period, we see that most frequent buyers never stopped making deals’, Bain & Company writes. ‘Not even when the market generally shrank. The same was true of the current market downturn that started with the introduction of higher interest rates in June 2022. Most frequent buyers continued to make acquisitions.’
Perhaps counterintuitively, the current longer-term market downturn signals a fundamental shift: The frequent buyers who remain active during tough times are expanding their lead over the less active or inactive companies as measured by long-term total shareholder returns. It is companies that invest to continue making acquisitions through the cycles and deploy proven and tailor-made toolkits to transform their businesses that ultimately emerge as winners, the consultancy concludes.
Read also: ‘Contrary to what you often hear, acquisitions do create value’
