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January 03, 2023 5 minute read

How To Navigate M&A and Thrive During a Recession

Recessions are one of the most notable events that potentially devastate national and international financial markets. However, as they’ve become a regular part of the modern economy, consumers and businesses can’t wait them out. Instead, it would to navigate M&A during a recession with the right mindset and necessary preparations; even as the economy takes a sharp plunge that hinders growth and drives down the country’s GDP.

Typically, recessions last anywhere from two months, like the 2020 COVID-19 recession. To an upwards of 18 months, like the 2007–2009 Great Recession. During this time, individuals are more likely to lose their employment. There’s also a distinct decline in consumer spending that tends to affect the bottom line of many business sectors.

Luckily, there’s a lot you can do to survive and thrive within a more turbulent market.

The Impacts of Past Recessions on M&A

Stock prices plummeted during previous recessions, creating volatile markets that complicate the work of investors. This drastically reduced the country’s M&A activity. As a result, the past 15 years have witnessed a reduced overall M&A activity by around 50% due to market volatility.

Value destruction is one of the primary factors behind the failure of mergers and acquisitions. During a highly volatile recession, value estimations of a company’s industry are likely trend downwards. This leads to a lower valuation than planned or agreed upon during pre-recession negotiations and contract drafting. 

According to Reuters data gathered on the 2008 recession, the total volume of mergers dropped by 44% in the year’s fourth quarter. The impacts of a downturn on M&A were observed in the cases of several failed mergers during the recession. 

Two examples include scrapping the $66 billion acquisition plan for the mining company BHP Billiton’s takeover of its rival Rio Tinto. In the same quarter, Huntsman Corp went back on a $6.5 billion deal that would have sold it to Hexion Specialty Chemical Inc. This sort of hesitancy is premature, though. Evidence provided by the Global Financial Crises shows that the corporations that went ahead with their acquisitions went on to perform better than their counterparts that scrapped their deals during the recession. Those companies were able to maintain a Total Shareholder Return (TSR) average of 6.4% throughout the first part of the recession. This was in comparison to the -3.4% TSR rate for companies that didn’t participate in the market.

The positive growth trend continued after the recession and into the first quarter of 2010. Companies that went through with their acquisitions had a TSR average of 10.5%, while their counterparts averaged 3.3%.

Read on to learn how you can achieve similar success when another recession inevitably occurs.

Navigating Future Recessions

Over the course of the past century, recessions have had a negative impact on the number of M&As performed by corporations and enterprises in both local and international deals. However, there is solid evidence that a well-studied merger or acquisition still benefits the participating parties, even during a recession. 

It’s irresponsible to respond to a recession by preparing for its impact only when its telltale signs manifest in the economy. Instead, flexibility and elasticity need to be built into the foundation of your business. This way you not only survive a future recession but also make decisions that enable you to thrive when it’s over.

Just Like M&A, Not All Recessions are the Same

One must start with the basics when navigating mergers and acquisitions during a recession. Not all recessions are the same. While some may seep into the various segments and industries of the market, causing a rapid decline. The others tend to be isolated within a few sectors that are interconnected financially.

If you’re in the early stages of an acquisition, start by examining the impact of the recession on your specific industry and how it could impact a targeted acquisition. Then, by considering short-term market developments, you might move to the next step, scrap the whole deal, and restart negotiations from scratch later based on the new economic circumstances.

The buyer in the deal should consider several scenarios depending on which turn the recession takes toward recovery. Whether the scenarios are L-shaped, V-shaped, or U-shaped. Deals made during such conditions often include shared risks, where both companies agree to accept a percentage of the risk in case of failure or economic repercussions.

For M&A deals that are further along, more urgent intervention is required. Adjustments that benefit both parties are necessary to ensure the deal’s success. Mainly, the buyer will need to consider how the business will be able to react to the changing economy once the recession is over.

The State of M&A in 2022

As the rates of M&A have been gradually recovering to pre-Great Recession times, 2021 had the highest number of mergers and acquisition deals performed on record. However, rising interest and inflation rates occurring on a global scale should not be ignored.

“In a couple of years, economic growth will slow because of the high interest rates. As a result, the general appetite for acquisitions will fade. Valuations of companies and their assets will drop both from weaker top-line expectations and a higher discount rate applied to future profits. In other words, acquisitions will be cheap,” wrote Bill Conerly, Ph.D. for Forbes

“Companies looking to grow will find good prices. But will they be ready?… Being a successful business leader is partly about moving forward and biding one’s time. The move-forward CEO often has a personality that doesn’t wait too well. A good number-two person or advisor can help with that,” added Conerly.

Future mergers are expected to be built on personal and mutual relationships between businesses in the same industry. Therefore, a list of potential future partners involved in an M&A deal may promote more balanced deals. In addition, the risk is minimized because the participating parties share it.

Keeping an Eye on Government Legislation

In the U.S., mergers require the approval of the Federal Trade Commission (FTC) and the U.S. Department of Justice. During recessions, especially ones caused by a regional or global non-financial incident, such as the COVID-19 pandemic with the 2020 recession, the government and policymakers could alter the regulation and policies governing the country’s economic landscape.

Keeping an eye on the political landscape enables you to predict better both short- and long-term M&A possibilities and their impact on both the buyer and the seller.

Mergers and Acquisitions During a Recession

A recession can conceal powerful opportunities to expand your business. M&A is considered a highly critical and sensitive operation with the potential for numerous fail points. This stands true during a recession and means you must recalculate your moves and account for the market’s high volatility.

Devensoft offers one of the most comprehensive M&A SaaS platforms for corporate development and integration. It’s used by the finance teams of some of the leading companies in their industries around the globe. Being a platform that provides them with data-backed insight regarding financial and corporate decision-making.

To help you simplify current and future M&A processes, you need a trusted companion to guide you through the ever-changing landscape. Contact Devensoft today to get a personalized demo. 

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