What's Next for M&A?
By Rusty Wiley, Datasite CEO
Though the Elon Musk-Twitter fight is currently grabbing the market’s attention, it’s not completely uncommon for M&A deals to fail.
To put it simply, not all deals are meant to be
There are many reasons companies want to acquire another company or some of its assets, including achieving economies of scale, value creation, or gaining additional market share and presence in new locations. In many cases though, the acquirer wants to create value that just isn’t possible if it remained a standalone business. By combining with another entity, the acquirer often wants to gain synergies.
Yet even the most accomplished deal teams can and do experience M&A failure. Deals can collapse for many reasons, including overestimating synergies, regulatory challenges or failing to account for cultural differences. In fact, research pegs the mergers and acquisitions failure rate at somewhere between 70% to 90%.
At a time when global M&A volume has dropped 17% in the first half of 2022, compared to the same period last year, the news surrounding the Musk-Twitter deal failure is causing some to wonder whether or not this is a sign that more failures are on the way.
Where is M&A headed?
A recent analysis shows that while deal terminations have spiked in the last two months, the number of deal terminations for the year are roughly about the same when compared to 2021.
What’s perhaps more important this year is for dealmakers to develop a coherent strategy, that considers how potential issues and regulations can affect their business, including the markets in which they operate or plan to operate.
Musk has said that he no longer wants to purchase Twitter because the social network didn’t provide him with the information needed to properly evaluate the deal. The battle is prompting increased interest in M&A, especially regarding regulations, public valuations, and the point at which a party can walk away from a deal without penalty.
Technology can help ensure successful M&A outcomes
However, M&A professionals have long been using technology, such as secure, virtual deal rooms, to interrogate data, perform due diligence, and navigate just these kinds of issues. Virtual data rooms give both deal parties the digital tools they need to streamline the management and processing of thousands of documents and artifacts, while also helping to reduce human error, and ensuring greater regulatory compliance. It's little wonder that, despite choppier market conditions, most global dealmakers said they are putting a greater focus on technology to boost productivity in the next 12 months.
This makes even more sense as M&A this year may still finish strong. In fact, recent survey findings show that 68% of more than 540 global dealmakers said that they expect global deal volume to rise in the next 12 months, primarily powered by transformational deals. Despite the threat of a global recession, the relentless pressure from new technologies is forcing many companies to make acquisitions, while tightening liquidity conditions, and a shift in focus from growth to cash-flow are driving some consolidation, especially among emerging technology companies and start-ups, many of which are now fighting for survival.
This is also something we are seeing on our platform at Datasite, which annually facilitates about 13,000 deals. New global deals, especially asset sales, purchases and mergers, are up 8% year-over-year through June.
Additionally, deal flow is changing. Forty-six percent of dealmakers said they expect a greater component of deals to be financed via equity, with an additional 34% predicting more straight cash deals. And while 78% of global dealmakers expect to factor in at least a 5%-7% inflation increase into their models, declining multiples will keep valuations down.
Deals are also taking longer to complete. The median length of time for a new deal to launch and close on Datasite’s platform has increased by 5% year-over-year through June, while deal preparation time is up 31% for the same period.
Yet even in the current choppier market conditions, there’s still plenty of opportunity, especially in technology, media and telecommunications, as well as industrials, transport and defense. Dealmakers just need to take advantage of the technology and tools available to them, including digital deal rooms, which can effectively ensure due diligence is carried out in a confidential manner.
Companies are facing increasing pressure to generate results in the face of fresh obstacles and dealmakers may be treading more carefully in the current market conditions. Nevertheless, tools that can help identify M&A risks efficiently, effectively and securely, can go a long way in providing assurances to all parties involved in a deal.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.