The capital available for deals usually dries up during a downturn. This time will likely be different, with companies better able to explore inorganic growth.
Conventional wisdom holds that mergers, acquisitions and other deal activity likely will plummet in an economic downturn, especially after record highs in M&A volume and a wave of stratospheric transaction values in recent years. Concerns of a steep drop-off are understandable. That’s what happened in the Great Recession, and the dot-com bust before that.
But the expectations of M&A’s demise may be exaggerated. While deal volume has declined recently, fears of a full collapse similar to previous cycles may be premature. In short, a combination of factors has been driving a decoupling of deals from the broader economy. That decoupling is different from past cycles, providing a higher floor that should prevent deal activity from evaporating.
With this anticipated resilience, prepared corporate and private investors don’t have to fully retreat in this downturn. As our research shows, organizations that make deals in a recession actually could outperform their industry peers.
Total volume and value of deals by US acquirers declined substantially during recent downturns, taking years to recover.
Source: PwC analysis of Refinitiv data, National Bureau of Economic Research
© 2019 PwC
The big reason for this decoupling is capital – the funding that companies can call on for deals. From cash on corporate balance sheets to undeployed capital at private equity firms to low interest rates for borrowing, many investors are in a solid position. The money available for M&A, whether it’s already in a buyer’s hands or within reach through a favorable lending environment, is real and substantial, PwC’s analysis found.
This structural shift, compared to a cyclical trend, shouldn’t change significantly even in a more turbulent economy. But for some decision-makers, it could require a degree of confidence that may seem counterintuitive in a downturn.
Consistent with conventional wisdom, our analysis shows that transaction multiples have historically fallen with the economy, resulting in lower valuations. The pool of acquisition targets should swell as it typically does in a recession, with pieces of companies or entire organizations adding to the M&A supply.
But the ability to buy – a key part of demand for M&A – will be stronger than in past downturns, thanks to both the level and mix of capital. Theoretically, this would imply that valuations might stabilize rather than dip during a downturn. Critically, however, not all potential acquirers will be in the same position. An economic downturn tends to impact marginal players – those that haven’t taken action to realign their business, shore up their balance sheet and address other key areas – and turn them from prospective buyers to potential sellers.
What´s driving capital that could be used for deals
The view that companies should pursue acquisitions in a downturn is contrary to traditional thinking. But it’s shaped by an understanding of what propelled past M&A cycles – the historical relationship between M&A and various economic and financial drivers – and what’s different today. In this series, PwC shares analysis and insight that explains this decoupling of M&A from the economy and outlines how investors can prepare to explore deals during periods of economic uncertainty.
Deals Leader, PwC US
Deals Research and Insights Leader, PwC US