In a Goldman Sachs podcast “What’s Next for M&A,” Stephan Feldgoise and Mark Sorrell observed that in 2021, there was a remarkably broad and consistent surge in M&A activity. Unlike previous years in which geopolitical blips interrupted dealmaking, a steady stream of deals were announced throughout 2021. They are cautiously optimistic that 2022 will continue the 2021 pattern, despite concerns about the resurgence of COVID and rising inflation.

The Goldman Sachs M&A executives contend that while boards are concerned with disruptive economic forces, most stay laser-focused on their long-term strategic vision. Clients ask “What do we need to do to be the winner 50 years from now?”

And although volatility affects how deals are executed, corporate boards are still moving forward to initiate strategic activities.

Here are some other points they made in the podcast:

Corporate M&A strategies are typically focused on one of three areas:

  • Executing a technology transformation (offensive or defensive)
  • Improving their ESG (environmental, social, governance) positioning or reducing exposure
  • Scrutinizing how they allocate capital (either on core or non-core activities) to ward off potential disruptions and ensure the long-term viability of their business.

Private equity activity will increase.

The definition of private equity has broadened and now represents about 30% of the M&A activity. Private equity funds have been one of the best-performing asset classes in recent years. So it has been drawing more investments and capital. As fund sizes continue to grow, so does their need to please investors by continuing to make more successful transactions.

Sellers have become more open-minded about partnering with private-equity firms. The financial backing can be a way for well-managed firms to address challenges related to technology, ESG, and capital allocation.

Shareholders are rewarding private-equity firms, even for deals that involve high multiples if they think the deal will help the company be a winner in the long-term. They are less focused on the immediate ROI of their investments.

The velocity of dealmaking and merger transactions has accelerated.

This can be attributed to factors such as the risk of rising interest rates and the quick availability of more data about each seller’s business.

COVID accelerated the adoption of technology, and changed how private-equity buyers think about opportunities. So, deal timelines have gotten shorter.

How We See It

The multi-billion-dollar corporations that Goldman Sachs serves can afford to think long-term. Their top-tier decision-makers are less likely to feel the month-to-month pain of supply-chain issues, worker shortages, and inflation.

On the other hand, owners of small- to mid-market companies must constantly address problems clouded by uncertainty about government policies, regulations, and likely interest rate hikes.

“The market could move quickly and severely based on what happens over the next couple of months,” notes financial consultant Michael Antongiovanni, CPA. “People don’t like uncertainty and the unknown.” Even if there was more certainty about bad news such as inflation and higher interest rates, business leaders could adapt and adjust.

Antongiovanni agrees that private-equity will become a much bigger force going forward, noting that “As interest rates rise, credit will tighten and equity valuations may fall. This will cause smaller strategic buyers to fall out of the market and allow the disciplined approach of private equity to enter.”

He predicts buyers will be more selective in 2022, because all of the economic and regulatory uncertainty will put more pressure on finding quality deals: “I think in this market issues such as concentration will kill deals, but marginal profitability might be okay.”

I agree with Mike’s assessment, especially because many smaller and mid-market companies may be desirable to “programmatic” investors. If your company has achieved a competitive advantage in a targeted market and has a strong leadership team, you may receive inquiries about buying your company, even if you haven’t officially put it up for sale yet.

According to McKinsey researchers, programmatic investors have developed a systematic method through which they proactively seek acquisition targets that might help them achieve a specific long-term goal. Programmatic M&A teams typically focus on finding 1, 2, or 3 deals each year. And they have the full support of their board of directors in terms of the type of company they are seeking to buy.

Programmatic M&A teams look for owners who have longer-term visions and will be interested in a deal that is less about the transaction itself and more about a successful partnership. McKinsey analysts have discovered that the programmatic approach to investing has measurably been more successful over the past 10 years than deals that were organic, selective, or large and transformational.

We Can Help

If you are thinking of selling your business in the next two years, call me at 561-543-2323 and I can tell you more about how to prepare for a meeting with a programmatic M&A team and achieve the best possible partnership. To get a sense of some of the errors that can derail a potentially good deal, download the white paper, Code Red: 12 Seller Mistakes.

Recommend Resources
Podcast: Exchanges at Goldman Sachs: What’s Next for M&A
Podcast: McKinsey Inside the Strategy Room: Programmatic M&A In the New Normal