Carpe diem menu4/5/2023 We believe that winning M&A teams will deploy scenario planning that rigorously assesses the range of outcomes in five key areas of M&A uncertainty: the cost of capital, the availability of capital, the impact of inflation on margins, scope vs. The truth is that many executives have only experienced a low-cost-of-capital environment and will find it necessary to brush up on the deal model impact of the rising cost of capital. Every model will be unique, but the range of new variables has grown significantly. What’s also become more important is the ability to use leverage and the cost-of-capital advantages. In many cases, companies will need to derive revenue and growth in a more national, instead of global, scenario. Let us give a couple of examples: Margin expansion will be more challenging, so models must reflect a realistic assessment of the efficacy of price increases against likely input cost inflation. Likewise, being a low-cost producer will require greater investment in supply chain resiliency. We see strong possibilities for companies willing to act. This must start with revising their M&A playbooks so that executives have a clear view of the full range of potential outcomes. And as the winners adjust their corporate strategies for times of uncertainty, they continue to use M&A as one of the big levers to gain and strengthen their competitive advantage. Recession winners average 14% in compounded annual EBIT growth in the 13 years following a downturn compared with zero for recession losers, according to our study of nearly 3,900 companies. ![]() Companies that invest throughout the economic cycle have far superior returns than those that participate sporadically. In the face of so much turmoil, it is easy for corporate dealmakers to get conservative.īain’s research, however, has determined that the greatest competitive market shifts take place during times of turbulence. What does this mean for companies trying to get deals done? The volatility we’ve witnessed in the first five months will likely continue throughout the year amid continuing inflation, recession fears, supply chain constraints, geopolitical tensions, increasing regulatory scrutiny, and Covid-19’s unpredictable path. That said, based on the first five months’ performance, 2022 could reach $4.7 trillion in deal value by year-end (see Figure 1), which would make it the second-best year on record. ![]() So far this year, the M&A pace has cooled off, with aggregate deal value down by about 20%. In 2021, total global deal value reached $5.9 trillion. For instance, Celanese’s $11 billion purchase of a majority stake in DuPont’s mobility and materials business is intended to strengthen the acquirer’s market position. And industries still consolidate via scale M&A. For example, companies still turn to dealmaking to add new capabilities, as Broadcom did with its recently announced $61 billion acquisition of VMware. And we see that market leaders continue to do M&A, even during these turbulent times. Meanwhile, private equity investors’ pockets are as deep as they’ve ever been. Most businesses still have strong cash flows and balance sheets. We still live in a world where capital is generally available for deals. Yet, amid all the disruption and risk, it’s easy to overlook the fact that the fundamentals still exist for robust M&A opportunities. ![]() Supply chain issues have mounted while the war in Ukraine and heated geopolitical tensions from US-China relations have accelerated the retreat from globalism and cross-border deals. Governments around the world have raised interest rates, causing the cost of capital to increase. The world of M&A is far more complicated than it was in February 2022, when we released our fourth annual Global M&A Report.
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