Succeeding through M&A in uncertain economic times

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.

Although M&A declined during the dot-com bust, a PwC analysis found that companies that made deals during the downturn ultimately saw higher shareholder returns than others in their industries.

Past M&A cycles and economic recessions

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

A structural shift in deals and capital

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.

An eye on valuations

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 you need to know to prepare

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.

M&A cycles: Fundamental drivers and valuation impacts

Like the economy, M&A moves in cycles. The fundamental drivers and influences, and the related returns, are constant and include buyers motivated by growth strategy, capital enabling the transactions and economic conditions. But the specific features of each M&A wave can differ significantly – from the sectors involved to the typical deal structure to the players in the field. Private equity, corporate cash and other borrowing have contributed to a substantial shift in funding for deals in the current cycle. And an analysis of shareholder returns in between the waves shows how deals launched during a downturn could drive growth.

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The state of capital for M&A, and how it could change in a downturn

The amount of funding available for deals is larger and more diverse than ever. Volumes have been driven by the “global saving glut,” and the mix has shifted from public to private. This capital isn’t spread evenly across industries, companies and private equity firms, and not all of it likely will hold up in an economic downturn. But even if some funding sources decline, many corporate and private acquirers will be able to call on capital for strategic investments.

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Preparing for successful M&A in uncertain economic times

They may have the capital for deals in a downturn, but companies, private equity firms and other investors need to take decisive steps now to ensure they realize the benefits of those transactions. From improving operations to reducing costs to updating growth strategies, how you position yourself today is critical for successful M&A in uncertain economic times. That means having the right tools to assemble a deal that will deliver value after the downturn.

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This series has been updated since its original publication in September 2019. Visit our website for more on responding to the potential business impacts of COVID-19. 

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Colin Wittmer

Colin Wittmer

Deals Leader, PwC US

Curt  Moldenhauer

Curt Moldenhauer

Deals Research and Insights Leader, PwC US

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