The back-to-school season is an opportune time to take stock of the past year and outline trends for the current one. Rarely has this exercise presented such a stark contrast between the current economic climate and that of a year ago. The same observation applies to the mergers and acquisitions market (or M&A), which encompasses business acquisition transactions.

Indeed, the surrounding gloom is particularly acute given a multifaceted economic crisis: unprecedented geopolitical tensions, raw material shortages, galloping inflation, and plummeting stock markets…

Yet, at the onset of the war in Ukraine, the M&A market was booming. With over €5 trillion invested globally, 2021 shattered previous records. Competition among buyers intensified, particularly for larger transactions, driven by the growing influence of strategic buyers, family investors, and private equity funds.

In Belgium as well, most M&A advisory firms reported an excellent 2021 financial year, and the momentum continued into early 2022.

New trends

Should we therefore fear a widespread economic crisis? To what extent will these factors disrupt acquisition financing and bring an end to the boom of recent months?

It is worth recalling that economic activity ground to a sudden halt due to Covid two years ago. The prevailing narrative then was just as pessimistic as it is today, albeit for different reasons. Ultimately, that crisis impacted specific sectors (hospitality, events, etc.) without ruining the entire economy, largely thanks to government support measures.

These various crises, as disruptive as they may be, reveal new societal trends that should offer hope. The cessation of Russian gas deliveries is forcing Europeans to accelerate the decarbonization of the economy, which our planet so urgently needs. Raw material shortages, rising transport costs, and strict lockdowns in China are prompting Western countries to re-shore their production facilities.

For M&A activity, rising interest rates and uncertainty regarding future performance certainly pose significant challenges, as access to leverage will be more difficult to secure. However, the use of vendor loans and earn-outs (variable, deferred payments) helps counter this obstacle. Regarding valuation levels, the current crisis will likely allow a return to more reasonable multiples (*). Furthermore, the core drivers behind business sales (retiring owners, desire for a career change, etc.) have not disappeared (), nor have the substantial cash reserves available in the market.

Patience…

Our economy is primarily driven by SMEs that have demonstrated resilience and agility. To manage the current crisis, measures are being taken by our governments and central banks, though their full effect has yet to materialize. Patience is therefore required.

In conclusion, without minimizing the problems, we should avoid falling into excessive pessimism. Let us use our analytical capabilities to best address the challenges ahead and adapt by steering our activities toward future sustainability. Every crisis brings its share of opportunities—certainly in the field of corporate sales and acquisitions.

(*) EBITDA multiples in certain sectors, especially for large-scale transactions, have risen significantly over recent years. 

(**) As demonstrated by the Sowalfin study Retour sur 2021 et perspectives 2022, available online.