M&A in times of crisis – Current trends and challenges in respect of corporate transactions

Current challenges and trends 

In recent years, the M&A market has undergone dramatic changes due to protracted crises (the COVID-19 pandemic, war in Ukraine and other geopolitical tensions, inflation, rising interest rate levels, etc.). Uncertainty and volatility have led to a marked decline in the number and volume of M&A deals. The trend here has been moving away from large deals towards medium-sized to small deals. The increased interest rate level has made the pursuit of large deals, in particular, more unattractive. Another trend mirrors demographic developments – while the generation of ‘baby boomers’ is gradually reaching retirement age, many successions still remain unresolved and require support for succession planning. 

A further observation is that the expectations of sellers and buyers about pricing have become even more unbalanced. Even though this may generally be in the nature of things, this trend has gathered further momentum still in view of the higher interest rates as well as the decline in multipliers. Sellers continue to hope for purchase prices from the record-breaking year of 2021, while buyers however no longer have the financing options that were available to them in 2021. This is because, besides the increased interest rate level, the risk awareness of capital providers as well as the overall risk have gone up on account of changed market conditions. Those who have appropriate liquid funds are able to finance transactions – at least to a large extent – independently and are thus at an advantage (cash is king). As a result of this, the M&A market has thus recently increasingly developed from a seller’s market to a buyer’s market.  

Please note: Naturally, despite these current challenges, it is basically still possible to successfully conclude a transaction, especially if the measures described below are implemented.

Factors for a successful transaction

Sellers and buyers will be able to take the following measures in order to successfully structure a transaction in the current difficult M&A environment.

Optimise due diligence

A thorough due diligence process is vital for identifying and assessing potential risks. It is important to analyse the financial stability of the target company as well as the possible impacts of crises on its business model. Sellers should take preparatory measures and make all the relevant information transparently available, while buyers should carry out a careful review with respect to, in particular, any impact from the aforementioned crises (extraordinary effects recognised in income, changes in supply chains and the customer structure, etc.). 

Demonstrate flexibility 

Compromises will help to bring a transaction to a conclusion. This also applies to the price and contract negotiations. Sellers should potentially be prepared to adjust their price expectations and be accommodating towards the buyers in order to compensate for the effects of rising interest rates. Buyers could try to suggest alternative payment structures or earn-out agreements in order to minimise the risk and still be able to submit an attractive overall package to the sellers.

Secure the financing 

Buyers should ensure that they have sufficient financial resources available in order to conclude the transaction. In doing so, alternative sources of finance should also be considered in order to mitigate the effects of higher interest rates. This could involve looking for investors or partnerships, for instance. Sellers can also make their own contribution towards this. For example, vendor loans and earn-out agreements, among other things, could optimise a buyer’s financing structure and yet ensure that the overall package is fair.

Enhance communication and transparency 

Open and transparent communication between the parties is crucial for avoiding misunderstandings and maintaining trust. Regular updates about the progress of a transaction could help to reduce uncertainty. Moreover, transparency in the data and the documents – on the part of both the buyer as well as the seller – is a major prerequisite for a successful transaction. Therefore, even before the start of any M&A process, it would be advisable for sellers to set up their businesses in such a way so that, during a subsequent process, the highest possible level of transparency could be ensured and any hurdles could be addressed (internally) at an early stage.

Recommendation: Despite the current difficult market environment, M&A transactions can nevertheless be successfully structured. In order for this to be achieved both buyers and sellers will be required, more than ever, to communicate openly and transparently and to cooperate with each other. Careful planning and preparation, a clear vision, professional advice as well as an in-depth analysis of potential partners and markets will increase the chance of bringing a transaction to a successful conclusion.