There are three M&A success factors that dealmaking executives must understand to thrive in the sizzling M&A market that saw a record high value of US$5.9 trillion in 2021, said Bain & Company recently when releasing its fourth annual M&A report based on a global survey of more than 280 executives.
In a white-hot market, valuation multiples hit an all-time high of 15.4 times enterprise value/EBITDA, the firm noted.
Tech assets, in particular, decoupled from the broader M&A market, with multiples at 25 times, according to Bain, adding that the healthcare industry saw its asset prices soar, with median multiples at 20 times.
Despite the high prices, new research suggests an optimistic outlook for deal activity in 2022.
The survey shows a full 89% anticipate their own deal activity will stay the same or increase this year.
“This isn’t your parents’ M&A market,” said David Harding, Bain & Company advisory partner. “If you peer beneath the headlines, the modern-day story of M&A becomes significantly more complicated. Dealmakers are grappling with increasing multiples and a growing diversity of deal types, with alternative models such as partnerships increasing. We wrote this report to help executives sort out ways M&A can create value despite these complexities.”
According to Bain, dealmaking executives must get the following three factors right to be successful.
Talent retention. M&A practitioners cite talent retention as a leading driver of M&A deal success, second only to having a clear deal thesis. M&A, at any point in time, can cause employees to worry about uncertainty and change, leading them to consider other options.
This is particularly pronounced as today’s hot labor market requires a new focus on retention challenges.
In tech, for example, more than 75% of executives feel that retention is now more difficult than it was three years ago.
The biggest retention risks, according to tech executives, are uncertainty about one’s role in the future organization and attractive alternatives in the labor market.
Successful talent retention requires companies to be proactive about talent in both the diligence and integration, establishing a strong and compelling vision for the future that employees can mobilise behind.
Dealmakers are behind on ESG. Although ESG is quickly becoming a marker of business quality, only 11% of M&A executives say they extensively assess ESG in the deal-making process on a regular basis.
However, 65% of those surveyed expect their company’s focus on ESG to increase.
In the consumer products industry, for example, 68% of executives view ESG as a means to gain share, improving their brand image and appealing to changing consumer preferences.
When looking at the energy sector, energy transition deals accounted for about 20% of all deals greater than $1 billion in 2021, and Bain expects more energy companies to use deals as a way to green existing assets in the year ahead.
ESG needs to be more than a check-list item during the M&A process, and it can take multiple forms in deals: acquisitions can be “ESG-motivated” and hinge upon an ESG thesis, or they can be ESG-conscious, pursued for other reasons but with eyes open about the ESG considerations at play.
Success in this arena will require linking overarching corporate ESG strategy to M&A strategy, making sustainability a part of each deal thesis and setting ESG as a factor in delivering deal value.
The changing regulatory environment. In the US, Western Europe and China, a combination of increased antitrust enforcement and rising national security concerns are requiring executives to rethink the completion odds of many deals.
The past year saw several high-profile deals abandoned due government opposition, and this scrutiny is likely to increase next year.
2021 brought new geopolitical considerations, particularly with regards to China’s crackdown on large businesses.
However, it remains a strategic market for growth despite its tightened regulations.
Success in this market requires buyers to reassess their expectations, planning for longer approval times, preparing for extensive information disclosure requirements, and addressing antitrust and data security issues.
In addition, multinational corporations must treat their China business separately from the rest of the corporation, adding necessary China-specific operations when looking to acquire within the country.
