Given the current economic landscape, naturally businesses are proceeding with caution regarding activities related to mergers and acquisitions (M&A). Financial markets are unpredictable, inflationary pressures are hitting countries worldwide, and the current energy crisis continues to affect global supply chains. Then, of course, there are the geopolitical effects of the Russia-Ukraine conflict. Understandably, investors and buyers are likely to be more cautious as a result.
History shows us how watershed moments impact the cyclical nature of deal-making.
In 2008, for example, deal volume fell by a third, and many deals were cancelled in response to the global financial crisis that followed the collapse of Lehman Brothers and subprime loan investment losses. The burst of the dot.com bubble before that and, more recently, the impact of a global pandemic are other notable examples.
However, the impact of global events doesn't mean deals grind to a halt altogether; while volume often falls, the returns from those that do go ahead can be more significant.
2021 saw a bumper year for M&As as companies and markets reset after the pandemic.
However, deal volume and values were so high that based on the peaks and troughs we see in deal-making, it was unlikely that this level of momentum would be sustainable in the longer term.
Despite the difficulties of 2008 and the recent pandemic, astute dealmakers spot opportunities to invest while valuations are lower. Moreover, their insight is often rewarded by higher total shareholder returns (TSR) in the following years.
To explore these opportunities in more detail, we sat down with Sindre Talleraas Holen, Chief M&A Officer at leading business software and information technology consultancy, Visma.
You can listen to the full interview below:
Sindre has successfully run and closed over 300 acquisitions in the last 14 years. In our conversation, he shares what he has learned about managing deals in changing circumstances, how speed is more important than ever, and offers advice to those wondering if now is a good time to sell.
According to McKinsey;
‘…if history is any guide, the current environment may present an excellent opportunity. Deal makers with the conviction to act during uncertain times have been much more likely to deliver strong total shareholder returns (TSR) than those who confine their deal-making to bullish periods.'
PwC agrees, arguing their research highlights that although deals in the aftermath of the dot.com crisis fell, those convinced to seek out and close opportunities saw higher shareholder returns in the longer term.
Although capital reserves are more likely to be under pressure during an economic downturn, and the cost of borrowing might seem eye-watering, those that can and do invest can outperform their peers.
Similarly, Sindre argues that dealmakers should 'never waste a good crisis', summarising Visma's belief in getting stronger during times of difficulty. Markets and valuations have gone down, but as Sindre argues, countries are experiencing the impact of current events differently; there are always opportunities somewhere.
Specific sectors are likely to do better than others too. According to Morgan Stanley, corporates are likely to be in the market to buy as they look for opportunities to continue improving their digital capabilities. They also predict further activity in the energy sector as businesses prepare to transition to sustainable energy production and seek to enhance their environmental, social and governance (ESG) performance.
With this in mind, we asked Sindre for his assessment of current M&A opportunities in Europe, what he looks for in a target company and how dealmakers can flex their approach in a challenging market. Here's what Sindre told us:
Although financial markets worldwide are starting to trade up again, the pricing and values seen in 2020/21 are a distant memory. Expect the unexpected and for markets to continue fluctuating. Sindre believes there is a substantial shift towards sustainable profitability and growth, perhaps as investors recognise short-term gains are less likely.
With inflation in the European Union (EU) reaching a record high of 11.5% and just over 11% in the UK in the last quarter of 2022, acquirers also set their growth thresholds higher. Sindre asks target companies how much they are growing over and above GDP, arguing that current conditions mean the bar for 'good growth' is also set higher.
On the flip side, however, Sindre underlines the importance of continually assessing a target's performance beyond the present situation. Of course, when economic conditions are volatile, the criteria for success change and expectations differ. But what happens when things return to some balance, economically speaking? Given that the bar is set higher for growth in a volatile market, as a buyer, are you confident of what business-as-usual will look like, and will that deliver the returns you seek in the future?
Not necessarily, Sindre argues. While the past few years' high valuations are behind us, and markets are more cautious, good companies trade well regardless. So building a solid equity story for your business is critical; detailing past achievements and showing a clear strategy for achieving milestones in the future with stakeholders and possible investors in mind is crucial.
If you are considering selling, here are four tips Sindre believes will start things well in the current trading environment.
Start early
Early preparation is vital for any deal, even under favourable economic conditions with higher valuations. However, Sindre recommends starting earlier still in periods of downturn or recession.
Planning a sale long before talking to potential buyers is essential to avoid problems and delays down the line. While an ideal situation might be to have gathered and stored the documentation needed for a potential sale from the moment you started your business, in more realistic terms, you might start the process up to two years before deciding to sell.
As Sindre says, selling your company is a big deal. You've invested time, energy and money into something you are passionate about, so whom you sell to and how matters.
The information-gathering phase might take a few months or several years, but the stakes are too high not to do it well. Bring expert advisors on board, such as lawyers, so you'll benefit from the advice of professionals with experience consulting on many other deals. Furthermore, trying to manage the due diligence and negotiation process yourself is time-consuming and distracts you from the daily needs of your business.
Open your data room early too
Part of the preparation phase is opening a data room so that you can begin uploading documents ready for potential buyers to view. The list of information needed is long and varied. It includes financial statements and forecasts, employee contracts, patents, sales and marketing data, ESG factors, and technology audits, to name just a few. Being organised early helps you feel more in control and starts a potential sale positively.
Sindre points out that you'll be talking with professional buyers with specific expectations and requirements. Investing time in this preparation stage will put you in the best position possible during the following due diligence phase.
Choose your data room provider carefully
It helps to have a proactive and supportive team around you when considering a sale of your business. Much of this support and guidance will come from your board of directors and external advisors such as legal and financial consultants. However, Sindre believes having what he calls 'a strong VDR provider (virtual data room) behind you' is just as important.
He highlights that the number of people involved in a deal is increasing, equating to a more significant number of users in the data room. In addition, buyers are pickier in uncertain trading conditions, so sellers should expect greater scrutiny at every stage of the process.
Knowing you have the right tools helps - a good data room streamlines the process allowing you to anticipate and exceed expectations by being highly organised. But it also facilitates discussions by keeping documents secure and manages complex Q&A and team communication.
Sindre adds that one of the most important factors for him and his team is the usability of the data room. He wants to know that he, a team member, or anyone involved in the process won't 'get lost' once they are inside the data room. For this reason, picking which data room is the right fit for your company is also key. In other words, is it intuitive, easy to navigate and adds value to the process through process efficiencies?
Be prepared to work faster than usual
While Sindre believes buyers become pickier in uncertain conditions, he also points out the need for speed. He thinks it's primarily a result of trading during the pandemic; out of necessity, buyers learnt to work faster by cutting out unnecessary steps in the process.
Experienced buyers are adept at identifying targets and knowing how much risk they are prepared to take. The outcome of this is two-fold. Firstly, they may be quicker to withdraw from a transaction if they fail to see the synergies or benefits they seek. Secondly, once they are confident to pursue an opportunity, they move with greater speed and expect all parties to do the same.
For Sindre, this means having the right data room provider behind you, the right team of experts around you and the knowledge that you are making the most of deal-making technology to support your goals.
To explore these issues further, listen to our full conversation with Sindre,Chief M&A Officer at Visma. In a wide-ranging discussion with Mari Nygård, Head of VDR at Admincontrol n, we discuss:
The benefits of deal-making technology
How the role of a data room has evolved
Factors to consider when buying or selling during uncertain economic conditions
The importance of assessing a target’s technology stack as a buyer
Learnings from leading and closing over 300 deals in 14 years