M&A trends: ESG, rising interest rates and tight labor market

The first half of 2022 was an eventful half for the M&A market. What are the prospects for the next six months? For example, the ESG theme provides an extra element in acquisition agreements, acquisitions take place in previously less sought-after sectors, and the tight labor market provides extra access.

In the first half of 2022, M&A activity remained high compared to 2021. Agreements take longer to implement due to the effects of rising commodity and energy prices. For the second half of the year, we do not see any decline in M&A activity at the moment, and multiples in sectors such as IST, business services and industry remain unchanged at a high level.

The ESG has an impact on the implementation and trading activity of the trade

The Environmental, Social and Governance (ESG) agenda is increasingly being prioritized in acquisitions. Definitely at Private Equity parties and companies. But also family offices and Mid-Corporate companies with a strong own performance on ESG or a strategic focus on ESG implementation. Certainly in sectors where a more active ESG policy is required by current or future legislation. This focus mainly generates additional agreement activity, but also means that agreements sometimes jump off for this reason. In the latter case, the ESG theme is not yet elaborated enough in the company’s business model, is not yet technically perfect or adds too little value. ESG is therefore an option, but also a risk if ESG performance is too low.

It is expected that the ESG principle in the slightly longer term will be one of the top priorities on any management agenda and will therefore increase trading activity. Aeternus expects increased trading activity, especially in construction and installation, energy and sectors that process chemical raw materials. Companies that are at the forefront of diversity and inclusion are also more attractive to potential buyers. An additional advantage is that companies with good ESG qualifications can more easily obtain financing with better price and loan conditions.

Rising interest rates require more creativity

Rising interest rates will have an impact on the financing of the agreement. The usual key figures for bank financing will be filled more quickly, and this will require greater creativity in connection with the agreements. This will have fewer consequences for trading with companies, but will have fewer consequences for trading with Private Equity. For larger trades, the larger Private Equity funds turn to debt funds, which are often located outside the Netherlands.

Focus on industries that were previously less interesting

Limited availability of raw materials causes supply chain problems and sharp price increases. For some parties, this is a reason to invest in these industries. This also strengthens the willingness of market participants to invest in companies that occupy an important place in the chain in the supply and production of raw materials.

In this context, we also anticipate an increased interest in companies related to the primary agricultural sector and related companies and sectors, including, for example, companies in agrotechnology.

4. Focus on new sectors

Sectors that are now more interested than ever are companies that in the long run will benefit from high energy prices and energy conversion. The same goes for their suppliers. Companies in, for example, timber trade and renovation of homes are examples of this. But companies in electrical and electrical installation, insulation and energy saving also get a lot of attention.

5. High liquidity and dry powder from Private Equity drives the number of trades

Private Equity’s high liquidity positions and the availability of additional investment capital in the form of committed capital (‘dry powder’), combined with the still historically low interest rates, mean that Private Equity and Venture Capital are looking for new opportunities.

In this context, further progress is expected for SPPs (Special Purpose Acquisition Companies), which serve as a platform for acquisitions of existing companies in a promising sector.

6. From ‘long shot’ to ‘close shot’

The supply from China due to COVID-19, the exorbitant container prices and the Chinese support to Russia have made companies look for alternative suppliers in Europe. In the case of business-critical suppliers, the parties are also seeking acquisitions of European suppliers.

There are also companies that are looking at backward integration of activities by buying companies that can secure future supply. It may not be a large number, but certainly a trend with an increasing number in the coming years.

7. Tight labor market & war for talent

The tight labor market may also be a reason to buy companies, but it is a bit more nuanced than the simple ‘buying employees’, because then for that reason there would be acquisitions in almost all sectors. And that is not the case. The principle also seems fundamentally meaningless because it implies that people are being taken from existing companies to solve a tight staffing elsewhere.

This would virtually evaporate the purchased cash flow, and buyers generally do not pay for this. The interest is primarily in companies that employ people who can add value to the existing business model of buyers and can be a platform to attract additional talent.

This blog was previously published on Aeternus’ website.

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