An economic downturn is coming, economists say. It’s just a matter of when. Conventional wisdom holds that mergers, acquisitions and other deal activity likely will plummet with the economy, 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 quarterly US deal volume has dipped since 2018, a new series from PwC will explain how fears of a full collapse similar to previous cycles may be overblown. In short, a combination of factors is 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 plunging.
With this anticipated resilience, prepared corporate and private investors shouldn’t retreat in the next downturn. As our research shows, organizations that are opportunistic with 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
A structural shift in deals and capital
Video duration: 50 seconds
Declines in deal volumes in 2019 are largely due to high valuations, which have kept some buyers on the sidelines. Consistent with conventional wisdom, our analysis shows that transaction multiples tend to fall along with the economy, resulting in more attractive valuations. The pool of acquisition targets in the next downturn 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 likely will 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. So while we anticipate demand for deals will be higher than previous recessions, the usual increase in supply during a downturn will generate valuation opportunities.
What´s driving capital that could be used for deals
The view that acquirers should be aggressive in a downturn is contrary to conventional wisdom. 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 about the current landscape. In this series, PwC will share analysis and insight that explains this decoupling of M&A from the economy and outlines how investors should prepare today so they can explore deals during the next downturn.
Deals Leader, PwC US
Deals Sales & Marketing Leader, PwC US