Interesting conference on M&A 2022 trends on Thursday, May 19 at the initiative of Echos Capital Finance. Here is what we gathered from it.
In a context that is complicated because it is fraught with uncertainty, we are witnessing close-down scenarios : lock-down, border closures, embargo on Russian gas, etc.
These phenomena are already having a heavy impact – shortage of components, price increase for raw materials and energy (2 to 3 GDP its in France just with the increase inof oil and gas prices). Will price growth of 7 to 10% lead to a wage boom in Europe, as is already the case in the US? Will growth come to a halt, inflation rise and interest rates soar?
In any case, companies will have less access to easy money and this will lead to a reorganization of value chains, business perimeters and portfolios.
To better understand these effects and anticipate their consequences, three round tables were moderated by Emmanuelle Duten, editor-in-chief of Capital Finance, around central themes:
- Trends in the M&A market under high tension
- New antitrust issues
- Growth capital deals: growth and resilience
Trends in a high tension M&A market
Panelists expect strong M&A activity through the summer, even if deals take longer and are harder to close than a year ago – 2021 was a record year.
In Q4, the tightening of financing (LBOs, etc.) will slow down activity for large caps and high yield will come to a halt. Bank loans will be allocated more selectively and will go to assets that have already proven their worth. There are still deals above EUR 1 billion, but buyers are again asking for MAC clauses, reintroducing conditionality into the contracts. The decline in deal volume in H2 2022 is expected to be in the range of 15-20% (25% in the US).
Average time to deal completion is increasing, from 5.8 months in Spring 2021 to 8.2 months in 2022. Investors are demanding more analysis, resulting in a greater focus on strategic deals.
There are some nuances, however, depending on the sector. For example, IDEX, a renewable infrastructure platform, does not see any slowdown in M&A activity in its sector and no drop in valuations at the moment.
Investment funds will have to work harder on their asset portfolio. If it is no longer Beta that drives valuation growth, it must be sought through sales and profitability – as one participant summed up with the phrase “The magic period is over”.
The earn-out for the selling manager is observed in about 15% of cases. This mechanism complicates the integration of the acquired structure (the scope must be retained in order to determine whether the earn-out conditions have been met) and adds an additional technicality to the LBO arrangements.
The IPOs that were envisaged have all been halted in the current context of uncertainty.
Short term investment projects for Large Cap companies are on the rise.
For Mid Cap, the market will remain very active.
The High Tech, Banking/Insurance and Energy sectors will remain dynamic: Tech should be up 30% in the Mid Cap; asset disposals by Banks/Insurance are coming; the energy transition and opportunistic partnerships and JVs in Energy will support the activity. Cybersecurity and digital transformation are still in trend. The stakes on operational issues (implementation of synergies, etc.) are ever higher.
We are observing a “regulatory inflation” generating increasingly tight control of deals by competition authorities.
New antitrust stakes
The decision of the French Competition Authority, after 20 months of investigation of the case, not to require any commitment from the buyer in the But / Conforama deal is a first, linked to the exception of failing company.
The Authority considers that this exception is admissible if 3 cumulative criteria are met: the acquired company was at risk of disappearing; no other buyer made a better offer from a competition point of view; the deal / no deal comparison is not unfavorable to the deal.
When a takeover file is analyzed by the Commercial Court, the main criteria used – preservation of employment, development prospects and performance guarantees – do not cover competition. However, this dimension should not be neglected, as the competition authorities apply their criteria very strictly, analyzing the number of players in the market, barriers to entry and the impact on consumers if the company in difficulty disappears.
In general, anti-trust issues are becoming more and more complicated: Article 22, European Digital Markets Act, sanctions for failure to notify in countries that have been reluctant to do so, etc.
Growth Tech, this market segment which combines growth and resilience
This segment has developed strongly because there was a niche to occupy between venture capital and private equity reserved for the largest structures. Entities in the Growth Tech segment are highly attractive due to their scalability and the possibility of managing their revenues in a predictive manner.
But the “creative” valuation observed recently (multiples of over 20x sales at the end of 2021, compared to 10x in 2020 and 5x in 2017) raises questions: have we not gone too far? We are going to see “the end of market myopia”, with the redeployment of certain pockets of very agile capital.
After the first half of 2022, which saw the advent of 8 to 9 French unicorns, and after a record-breaking year in 2021, it is time for the ecosystem to take a breather and start again on a healthier footing. This means going through a recessionary phase, but one from which Growth Tech will emerge stronger:
- Even if we can congratulate ourselves for having reached the goal of 25 unicorns in France today (initially set for 2025), unicorns are going to have to focus more on their profitability and not just on unbridled growth to justify their fundraising. Becoming a unicorn is not an end in itself…
- If there is a landing of valuations, industrialists will also be able to invest in these companies.
- A drop in valuation will have a strong impact on the employee incentive programs put in place at the top of the valuation. This can create dissatisfaction and movement towards the best performing companies.
In conclusion, we can say that the M&A market is still very dynamic but that some adjustments in the coming months will allow us to better sort out the real opportunities, which create value in the long term, from the less mature deals. In the end, everyone will benefit.
