Investing in mergers and acquisitions (M&A) during an economic downturn or in times of economic turbulence may seem counterintuitive. The instinct is to preserve cash liquidity and cut spending. The environment for M&A transactions globally is very challenging as the banking crisis hits confidence. With rising interest rates, the first quarter of 2023 was the slowest start to the year since 2013. According to Refinitiv statistics, the value of M&A fell 45% year-on-year to $550.5 billion between January and March, the greatest drop in the first quarter since 2001.
Leveraging M&A as a Growth Engine – The Green Investing
Green investing is one of the most interesting approaches in M&A and presents itself as a thematic M&A opportunity that is gaining popularity in global markets. Interestingly, early indications of such acquisitions demonstrate considerable outperformance from a shareholder value creation standpoint. Companies that prioritise sustainability can create value through a variety of channels, including improved finance availability and lower fund costs, higher market valuation, operational cost savings from decarbonisation-related efficiency gains, and so on.
While M&A can be a powerful value-creation tool and a growth engine for most firms, especially in today’s market environment, strategic, financial, and operational discipline and focus are important to unlocking not just strong but also long-term value from transactions. Buyers must aggressively seek targets with the correct strategic fit, develop razor-sharp conviction in the business case, and establish best-in-class integration skills in order to realise the maximum value potential. Sellers must understand their future investors’ demands, create compelling proof points to back up their equity narrative, and plan ahead of time to mitigate any separation issues.
Companies that create M&A expertise and apply a systematic approach to acquisitions will win the race to reform India’s sectors and capture a large piece of the country’s spectacular growth in the coming years. Furthermore, for global businesses, it is important to invest only in consistent and active portfolio management, as well as other practises like ecosystem sourcing, target cultivation, and building culture and integration capabilities. This will help in mitigating the external pressures thereby expediting the M&A process, while delivering consistent value through M&A.
Global M&A Growth
The world of M&A, has seen an unparalleled upsurge, and it has become a key factor in the global economy and industry’s transformation. This spike in M&A activity is indicative of a time of strategic consolidation, heightened by globalisation, technological development, and changing market conditions. Geographical borders do not affect the transformative power of M&A, which unites businesses from various industries and geographical areas in search of synergies, market expansion, and competitive advantage. A number of factors have contributed to the global growth of M&A in recent years. In order to expand into new markets, diversify their product lines, and take advantage of synergies to strengthen their competitive positions, businesses are looking more and more for inorganic growth opportunities.
Additionally, because technological innovation is redefining industries at a rapid pace, businesses are being forced to engage in M&A in order to acquire disruptive technologies or gain a competitive advantage in the digital space. Furthermore, advantageous economic circumstances, like low interest rates and strong investor confidence, have created an environment that is conducive to M&A activity and has sparked a surge in deal-making across all industries. Market globalisation has accelerated cross-border M&A growth by allowing businesses to take advantage of opportunities outside of their home countries.
Global M&A Challenges
The global M&A market faces a challenging 2022 with M&A volumes and values declining from record-breaking highs (65,000 deals) in 2021 – respectively by 17% and 37% – although remaining above 2020 and healthy pre-pandemic levels. In the second half of 2022, deal volumes and values declined by a greater portion – by 25% and 51%, respectively – compared to the year prior. Regardless of market cycles, the programmatic strategy aids in effective M&A.
Companies across sectors should aim for a minimum of two to four small or medium-sized acquisitions per year. This helps in creating the required difference from peers and generates higher TSR (Target Shareholder Return) with less risk. According to McKinsey, programmatic acquirers’ median annual returns to shareholders outperformed their counterparts by 2.3% between 2013 and 2022.