24 October 2022
What Could Another Recession Mean for Mergers and Acquisitions?
Following the Great Recession of 2008 and the consequent plummet in mergers, acquisitions, and other deal activity, it would only be logical to expect similar in the face of another economic downturn. It is currently feared amongst many that soaring inflation and rising interest rates, coupled with geopolitical tensions may cause difficulty for businesses and result in a reluctance to undertake mergers and acquisitions. This concern is particularly pertinent on the back of a record year in the M&A market in 2021.
The period of heightened M&A activity last year saw some buyers agreeing to more favourable terms than they would ordinarily accept, as a result of certain risks within target businesses being overlooked by many investors and lenders in order to win deals due to exacerbated competition.
Today however, current market volatility may cause enhanced levels of caution and scepticism from both investors and lenders. This could trigger a shift in attitude eliciting a more tentative approach. Consequently, any businesses deemed to be risky or recession-susceptible are likely to see a significant decline in interest from the level they demanded in 2021.
It therefore follows that businesses deemed as safe or low-risk are expected to be in higher demand, as investors and lenders become more picky. Businesses with recurring core revenues and a high degree of industry predictability are expected to be among those receiving the most attention, as investors place a premium on businesses deemed able to withstand an economic downturn. For this very reason, we might expect the market for smaller deals to slow.
However, it may well be the case that this panic is overstated. The M&A industry now is potentially less cyclical than it has been in the past, due to a pressing need for companies to keep up with current innovation and technologies. As such, the threat of another possible recession may not yield such drastic effects within the M&A market as expected. Ultimately only time will reveal the true extent of the impact this might have.
Here at Cook Corporate we have not yet seen any reduction in our deal flow and we remain cautiously optimistic about the short to medium term.