Mergers & Acquisitions
Seizing Hidden Opportunities
How to execute successful M&A transactions in an era of tight credit
The credit crunch is transforming the market for company and corporate shareholding transactions.
Given this premise, what strategies should sellers and investors adopt to seize hidden opportunities?
In a historical moment characterized by high interest rates, M&A transactions are undergoing a profound transformation.
For entrepreneurs looking to expand their business or monetize created value, understanding new market dynamics has become essential.
The credit crunch, by modifying access conditions to financing necessary for M&A transactions, has caused the following effects:
Reduction in number of transactions
- Recent data shows a slowdown in the number of completed transactions, especially in the small and medium enterprise segment.
- Financial institutions have significantly raised the bar, requiring greater guarantees, reduced financial leverage, and more thorough due diligence.
- As a result, private equity-backed transactions continue to close while medium-small sized transactions face growing obstacles.
Pressure on valuations
- The increase in cost of debt capital has led to downward pressure on company valuations.
- Transactions are characterized by reduced valuation multiples, longer negotiation times, and greater use of earnout mechanisms.
- Sellers risk having to scale back their expectations while investors have the opportunity to make strategic acquisitions at more advantageous prices.
In this increasingly challenging and global context, working strategies require:
Diversification of funding sources
Market operators, acknowledging the reduced availability of traditional bank credit, are exploring innovative alternatives:
- Private debt: funds specialized in financing M&A transactions that combine debt and equity instruments.
- Seller involvement: structures with deferred payments or vendor loans help bridge financing gaps.
- Club deals and co-investments: risk sharing among multiple parties facilitates the completion of complex transactions.
- Alternative debt instruments: minibonds and other instruments represent increasingly used options to finance acquisition projects.
Growth in strategic preparation
Sellers and investors must prepare carefully before facing the transaction process to achieve their objectives.
- For sellers, it is advisable to implement preventive vendor due diligence processes, prepare realistic business plans, and optimize their organizational model.
- For buyers, it is advisable to build detailed dossiers for financial institutions, make progressive acquisitions, and develop clear integration plans.
Innovation in negotiation structures
The credit crisis is stimulating market operators' creativity, making them increasingly willing to consider:
- Hybrid operations: acquisitions involving combinations of equity and convertible debt instruments
- Variable price mechanisms: price adjustment clauses through more sophisticated earn-out provisions
- Progressive acquisitions: total acquisitions carried out not in one but in two or more solutions
- Partial share sales: acquisitions of minority stakes with granted purchase options to be exercised under defined terms and conditions.
These solutions allow alignment of parties' interests and facilitate transaction completion in a limited credit context.
Despite challenges from the credit crunch, entrepreneurs can capitalize on the following opportunities:
Investments in counter-trend sectors
The following sectors show particular resilience:
- Technology and digitalization: digital transition continues to drive numerous acquisitions
- Energy and sustainability: investments related to energy transition attract significant capital flows
- Healthcare: technological innovation in healthcare and wellness fuels the M&A market
- Essential services: business models capable of generating stable cash flows remain consistently attractive
Supply chain consolidation
The need to strengthen competitiveness and resilience is driving multi-sector consolidation operations and offering opportunities to specific companies.
I'm referring not only to market-leading companies but also to strategically positioned small and medium enterprises.
Restructuring and special situations
The increase in financial tensions is generating opportunities in the "special situations" and "corporate turnaround" segment.
Specialized investors in this case provide not only capital but also expertise for managing the restructuring process.
In this complex context, Advisors must possess the following evolving characteristics:
- Expanded financial expertise: The advisor must master a broader range of financial instruments and negotiation structures to orchestrate hybrid and innovative financing solutions in their clients' interest.
- Integrated approach: The advisor must be able to manage the transaction process by providing negotiation, accounting, tax, financial, corporate, and contractual expertise and must share their network of potential investors and financiers.
- Mediation and creativity: The advisor must manage misalignments between seller and buyer expectations and must facilitate the completion of balanced agreements by proposing creative and innovative solutions.
The credit crunch has undoubtedly complicated the M&A market, but prepared entrepreneurs can still conclude successful transactions.
In summary, the "keys" available to an entrepreneur to navigate this scenario include:
- Anticipation: accurate and timely preparation is fundamental to maximize chances of success.
- Flexibility: willingness to consider alternative structures can make the difference between success or failure of an operation.
- Partnership: relying on consultants with specific experience allows for safer navigation of current market complexity.
The credit crisis has made the path to completing Merger & Acquisition transactions more challenging. At the same time, it is generating opportunities for entrepreneurs who know how to adapt to the new rules of the game and surround themselves with the right partners.
Studio Mannelli & Partners offers specialized advisory services for M&A operations, supporting entrepreneurs and companies in successfully facing current market challenges.
Contact us for personalized consultation on your company acquisition or sale project or corporate shareholdings.
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