Panel focuses on turbulence M&A market encounters

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In spite of some market circumstances favoring sellers, the mergers-and-acquisitions market remains in flux. The reasons why were the focus of a recent panel discussion, “Current Trends in M&A Deal: Terms and Tactics.” The discussion looked at deal points, processes and strategies that differentiate successful buyers and sellers in today’s market.

“The market is skittish and slow right now,” said Andy Cantwell, CEO and managing partner of Carlson Private Capital Partners.

The panel discussion was part of Faegre Drinker’s 17th annual M&A conference held recently in Minneapolis. The conference featured a slate of panel discussions about activity and market trends in the area of mergers and acquisitions.

Private equity deals continue to drive M&A growth in the United States, representing $1.2 trillion of U.S. deal value last year. Private equity funds raised a record $733 billion in 2021. But various factors have created an unsteady market regardless.

“The emergence of direct lenders has been a factor; you’re seeing a lot of write-downs,” said Kenneth D. Baronoff, president of Solomon Partners.

More than one panelist made note of the extra-market factors that have played a role in slowing things down. The erratic economy, COVID-19, and possibly even the volatile political environment all can have an impact on how deals are done or even contemplated.

“You’ve seen increased skepticism recently,” said Cantwell. “Buyers are spending more time wondering, ‘What am I buying? Is this the best time? Is what we’re considering sustainable?’”

Baronoff also noted that environmental, social and governance (ESG) factors have taken on a bigger role. A company’s ESG status can be an advantage for strategic acquirers because it helps organizations in creating value, mitigating risk and becoming more resilient. Consideration of those factors in M&A transactions is rising.

“Sixty percent of investors are ready to walk away from a deal for ESG reasons,” he said. “It’s a very turbulent time.”

The pendulum has swung back so far, said one panelist, that it wasn’t long ago that buyers had to distinguish themselves somehow to get the attention of sellers. In fact, the current market to an extent reflects the residential real estate market in reverse: sellers, not buyers, are the ones more willing to take extraordinary measures to get what they want. The panelists used words like “rollercoaster,” “slow” and “challenging,” to describe the current market, but expressed qualified hope that things will pick up in 2023.

Cantwell noted that for reasons of growth and increased profitability, buyers are more frequently looking at recession-proof industries such as music, health care and fintech. A middle-quality company that previously would have traded in double digits is now either selling for less or not going to market at all.

Buyers in some cases might be creating a self-fulfilling prophecy by which seeing an acquisition target as more challenging financially creates a lag in the deal-making process, he said. “The industry is seeing companies that once traded at 15 times are now closer to nine or 10,” said Cantwell.

“There’s a greater risk in the market,” said Baronoff. “Both sides are making sure there’s a pathway to growth.”

Cantwell added that buyers are also protecting their flanks by ramping up due diligence efforts. “The cream is rising to the top and buyers are screening a little bit more diligently to make sure,” he said. “They’re looking for quality companies, so that has caused some resetting of buyers’ and sellers’ expectations.”

“Strategic financial companies, food and health care remain strong from a buyer private equity standpoint,” agreed Mo Gharib, partner with Vermillion Capital. “Because of market uncertainty, there’s an uptick in seller financing. Buyers are asking sellers to roll more creativity into deals.”

Steven C. Kennedy, a Faegre Drinker partner, also pointed to increased due diligence as a factor in the market’s sluggish recent history.

“There have always been risk areas, but sellers are now almost putting themselves in the shoes of prospective buyers,” he said. “They’re seeing regulatory factors to be careful about that they previously might not have had to pay so much attention to.”

Kennedy advised sellers to do anything they can to minimize risk for prospective buyers.

“You’re in the consumer business,” he said. “Do a brand study, or really anything you can to think through what a buyer might want or need. You’ll never get it perfect, but you have to make the effort.”

The panel was moderated by Ryan R. Miske, Faegre Drinker partner and conference co-chair.