The Keys to a Winning North America M&A Strategy: Persistence and Patience

In North America (NA), the current mood among dealmakers is an interesting mix. On one hand, bankers are relieved the feverish pace of 2021 has subsided. However, many of them are anxious because dealmaking has slowed in comparison to dealmaking’s historic heights in 2021.

The mergers and acquisitions (M&A) pipeline is healthy. But companies being represented by NA-based bankers aren’t as motivated to sell. On the buyside, strategics and private equity (PE) are being more patient on acquisitions.

That makes the competition for qualified assets strong here. In many ways, selling companies is like selling real estate. An attractive house that’s priced properly will always sell. Since M&A is a negotiation process, having options gives the seller leverage. Over the last two years, a company struggling to attract interest from buyers might have used a special purpose acquisition company (SPAC) to initial public offering (IPO) to unlock investor value.

But SPACs are no longer en vogue — due to most of them trading well below their IPO prices. With that trend having brought lots of scrutiny from investors and regulators, mediocre companies no longer have this outlet. They now need to generate buyer interest by improving their performance. On the buyside, it’s more expensive to finance these acquisitions so buyers are being even more selective.    

Valuations are currently a mixed bag in NA. It’s a topic covered in the SS&C Intralinks Deal Flow Predictor for Q4 2022, just released. (It’s a highly accurate six-month forecast of early-stage M&A activity around the globe.) Volatility in the equity markets has impacted valuations because public companies are used as a proxy when valuing private businesses.

Nonetheless, the trends are sector-specific. For example, in some pockets of Tech, we’ve seen valuations decline 70 percent. Yet other sectors remain steady, such as Healthcare Services and Energy.

Interest-ing developments to watch

With COVID-19-related lockdowns being a thing of the past (knock on wood), the main obstacle NA clients face is rising interest rates. This has led many firms to refinance their debt. In turn, boutique investment banks have gotten involved with financing so they can drive fees. Historically, this is a line of business they left to the bulge bracket banks that have a balance sheet. However, in a world of dealmakers, boutique banks have become resourceful during an M&A slowdown.

NA has its sectors worth keeping an eye on for Q4. A caveat: There are two ways to consider a sector worth watching. Is it an “active” sector, with very desirable offerings? (E.g., Healthcare Services, Business Services, TMT, Renewables and Consumer) Or, is it a sector forced to be active due to distress in its business model? The latter is mainly driven by the rise in interest rates and their inability to service debt. Therefore, look to sectors with high debt-to-equity ratios such as Transportation (Air, Automotive, et al.), Telecom or Manufacturing.

For NA in Q4 2022, the keys to winning are going to be persistence and patience. The call or meeting you book today is going to yield a deal in a couple of weeks (or maybe months) from now, so don’t wait. Since bankers are working at a less feverish pace, there’s a silver lining: They’re more available for meetings.

This creates the opportunity to engage with them in value-driven ways. More senior bankers who were around during the craze of 2021 will be especially interested in learning anything that can save them time. That’s because they know it’s only a matter of time until that pace returns.