While recent headlines have been dominated by gloomy economic news, a recent industry study finds that macroeconomic factors and M&A activity are somewhat uncorrelated. Here’s how.
The report from Deloitte titled The Path to Thrive: M&A Strategies for a Brave New World analyzed M&A activity alongside Federal Reserve interest rate decisions and inflation trends going back 40 years and found patterns of correlation to be “inconsistent.” In fact, the research found that M&A was in an upswing despite rising rates and inflation in the five-year periods leading up to 1999 and 2007.
Part of this can be explained by the fact that the dealmaking environment is simply more attractive for contrarian investors. “During periods of a downturn, there are abundant opportunities for value-enhancing acquisitions because there are fewer competitive bidders, valuations are lower, and previously inaccessible companies turn into appealing, affordable targets,” the report says.
However, another factor is the rise in defensive M&A strategies during periods of economic turmoil. Dealmakers and corporations can carve-out underperforming assets or take the opportunity to vertically integrate and safeguard their core operations.
Sriram Prakash, Deloitte’s global head of M&A insight, sees this playing out in various sectors as business leaders adapt to the unique economic challenges of 2023 and beyond. “There is plenty of evidence in the market of companies using vertical integration as a means for achieving supply chain assurance and building resilience across their value chain,” Prakash says. “For instance, in the automotive sector, we have seen EV manufacturers start to acquire battery cell capacity, which highlights the integration to develop capabilities in-house. Some auto manufacturers have started to form alliances with smaller semiconductor companies to jointly produce chips and secure their supply chain.”
Prakash has also noticed vertical integration in the aerospace and defense sector, where “a major company acquired its supplier of metal powders for additive manufacturing to secure its supply chain.”
Meanwhile, external pressures that go beyond macroeconomics are compelling corporations in specific sectors to divest non-core assets. “The transition toward a green and sustainable economy is a key driver for divestment activities in the oil-and-gas sector and its extended value chain, as they continue to shed their fossil-fuel assets,” says Prakash. Meanwhile, shifting consumer preferences are pushing corporations to divest assets that do not meet the requirements of “ethically sourced products.”
The resurgence of shareholder activism and regulatory scrutiny could also push telecommunications and technology firms to divest non-core assets.
“The importance of M&A as an enabler of change has been demonstrated by the record-breaking activities during one of the most difficult times in business history,” the report says.
Contact Prakash at [email protected].
–Vishesh Raisinghani
