M&A Trends Around Downturns: A Historical Perspective and Current Insights

Mergers and acquisitions (M&A) have been an integral part of the business world for centuries, with records dating back to the 17th century. When examining how M&A activities react to market conditions, you might go as far as to say history has a way of repeating itself – through this analysis, we can identify systemic, cyclical, and recurring trends that provide valuable insights. Let’s explore:

The Lead Up

In the lead-up to a downturn, it’s crunch time! M&A activities often proceed as usual, but sometimes we see even larger deal multiples. This phase is characterized by easy access to capital, high investor optimism and the continuous growth of business valuations. During these times, M&A activity, particularly by private equity firms, tends to reach historic highs.

The Event

However, when a downturn occurs, panic can quickly ensue and cause a halt in M&A activities. Lenders become cautious, rightfully so, and potential buyers adopt a wait-and-see approach. Valuations become uncertain, debt loads increase and debt maturity is extended. It’s during this period that corporations with strong balance sheets become more competitive in the market.

Post-Event

Following the downturn, M&A activity enters a stabilization phase, which typically lasts anywhere from six to 18 months. Valuations gradually normalize as they align with market expectations. There is a backlog of demand from private equity firms on the buy-side, and this pent-up supplier demand is released. M&A activity often comes back stronger and more bullish than before the downturn, and interest rates tend to remain relatively stable. The market eventually returns to a semblance of normalcy until the unavoidable happens: the next crisis event.

Now, let’s shift our focus to the current M&A landscape in 2023, which is regaining a particular trend that saw traction following the 2008 financial crisis.

The Resurgence of Operational Focus

Much like the aftermath of the 2008 crisis, operations today are regaining popularity. This post-event shift is influenced by changing seller expectations and buyer prudence. Buyers are taking more time during the diligence phase to closely evaluate whether performance forecasts align with their expectations. Many buyers are also investing significant time, energy, and resources into post-transaction operational efficiency, aiming to maximize unintended EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). Although somewhat cumbersome, taking these necessary steps positions buyers for the greatest deal success.

While some firms are tempted to handle operational due diligence in-house, we recommend seeking outsourced partners with the necessary expertise and ample time (hint, hint, check out our team here). This increased demand for operational output means that firms will require deep functional expertise in diligence capabilities with no room for error in order to navigate post-transaction integration.

M&A trends have shown a historical pattern of thriving before downturn, pausing during crises and then rebounding even stronger afterward. In a volatile landscape of what-ifs, it’s nice to know what trends we can expect. Today, operational focus is more prominent as buyers seek to maximize the value of their investments by optimizing post-transaction operations. By understanding these historical trends and adapting to current market conditions, businesses can navigate the ever-changing world of mergers and acquisitions more effectively.

Curious to learn more or how our team can help you with your next deal? Don’t be shy! Get in touch with us.