M&A expected to rise as US stocks suffer worst fall in over 50 years

Number of public-to-private transactions in early 2022 almost 50% higher than the same period last year

Business advisor, Claire Trachet – CEO and co-founder of Trachet, and CEO of accounting and consultancy advisory, Theta Global Advisors, Chris Biggs, discuss how dealmaking could increase amidst a spate of decreasing valuations

US stocks have experienced their worst fall in the first half of a year since 1970, marking the latest gloomy announcement from the financial world following the World Bank’s warning of a global recession last month. Specifically, the benchmark S&P index fell a staggering 20.6%, the Dow Jones more than 15% and the tech-heavy Nasdaq an even worse 30%. These falls have been mirrored by similar drop offs in markets across the UK, Europe and Asia. However, Chris Biggs, CEO of accounting and consultancy firm, Theta Global Advisors, and Claire Trachet, CEO of business advisory firm, Trachet, explain how this market could present a wealth of opportunities for deep-pocketed private investors looking to capitalise on plummeting valuations for both private and publicly listed companies. 

The highest profile and recent example of a plunging valuation is Swedish Buy Now, Pay Later giant Klarna, falling from $46bn to just $6.5bn. These declines have also had a knock-on effect on the value of dealmaking in 2022, with the first quarter of this year being 20% down on the same period last year. However, the number of M&A has remained strong, and an analysis from PwC has highlighted that deals done during times of economic downturn often provide buyers with better returns, meaning there could be a strong flurry of activity in the second half of the year. There has also been an increasing number of public-to-private transactions so far in 2022, further highlighting the opportunities that can be found in the current market. 

Ultimately, during times of high inflation, investors do not want to be sitting on their cash. This means that despite current market uncertainty, there will continue to be activity from VC houses and institutional investors – whether that is through acquisitions or funding. However, there has been a notable shift in the market away from late-stage startups with high cash burn, as a much greater emphasis is now being placed on sustainability. Therefore, it is the early-stage startups with this ethos in mind that stand in better stead amidst this challenging environment. In order for a deal or fundraising round to go smoothly, financial advisors are key in helping to facilitate the process and gain the best terms for the company involved. 
 
According to data from Deloitte, nearly two-thirds (63%) of businesses report that the success of their M&A was moderately or highly dependent on a successful transformation – often led by a senior level and external advisor. In order for startups to take advantage of the exit opportunities, Claire Trachet and Chris Biggs outline the importance of bringing an experienced CFO or COO – in an interim capacity – to implement transformational changes to working capital, reorganisation, increasing cost reduction, and legal entity restructuring to secure the best deal possible. 
 
Chris Biggs, CEO & Founder of Theta Global Advisors, explained how companies need to be agile in order order to complete an IPO or M&A in the current market:

“We’re trying to encourage companies to get themselves as ready as quickly possible. Because, if you have that little opportunity that comes up in six months’ time, you must take it and not push it out to 12 months. In an uncertain market you need to be ready to take the chance when it arises, as there may not be many more on the horizon – especially if the cash flow runway is limited. 

“A key part of that is enlisting the help of experienced advisors that can help you get your business’ shop window in order, so to speak. This early and expert preparation gives companies the greatest chance of getting a deal, IPO or fundraise over the line. 

“I think the private equity houses are looking for opportunities to invest in new companies, because it’s that first phase where you can start to invest and grow it – that’s where you can add the most value and see your overall investment grow. So, the problem is, if it’s a company they have already invested in for three, four or even five years they have already gone through that cycle. So, if they invest more in it they are going to get smaller returns for what they invest in.

“A lot of the PE houses would prefer to invest in companies where there is greater growth potential – i.e. that first round of funding that companies do. I think we are possibly moving into the environment where funding of private equity is going to become more common than funding through classic banks. Because these private equity houses need to get the cash out.”   

Business advisor, Claire Trachet, CEO & Founder of Trachet comments on the current state of the dealmaking market in 2022:

“Venture capital tends to work as a reactive market, each startup depends on the next stage (either a subsequent round of financing or an exit) for their short-term success – usually every 16 – 18 months. The startup ecosystem has enjoyed a generation of businesses that have only experienced a bull market, where funds and good terms have been widely available. As the world enters a bear market, it is the late-stage startups with a negative cash flow (a lot of them) and that have raised money at high prices, that are going to be the most compromised – the well of free money has dried up.
 
“We’re entering unchartered territory, forcing a conversation across all management teams will help create communication and agility. Startups would benefit from having a process in place for sudden changes within their immediate competition, industry, or the global economy. It’s important amidst these challenging times to assess end goals – perhaps in light of what’s happening, a better course of action may be to consider an exit, or conversely there may be another company worth acquiring to fortify and expand existing operations.

“Then startups should focus on extending the runway, so to speak – be diligent with the business’s working capital by optimising cash flow, review the contracts you have with your clients and minimise accounts receivable. Applying this mentality to the whole of the organisation is going to be key in the next year, whether you’re entering a fundraising round or considering an exit, ideally startups should be doing both.”