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A new report by A.T. Kearney, “Has the M&A Market Lost its Froth,” predicts that while deal volumes for large, more established businesses will stay at 2015 levels, valuations and liquidity that drove the “frothy” seller’s market in 2015 are giving way to a more balanced market.
With $365 billion in public and private transactions, 2015 saw the highest dollar value of deals in these sectors since 2008.
The report also predicts that 2016 will be characterized by tighter credit markets and lower valuations, especially for smaller companies with riskier, more volatile cash flows. The M&A market in consumer-retail overall will be active, but will also return to a more rational market with better balance between buyers and sellers and more reasonable deal values for higher-risk acquisitions.
Based on interviews with C-level retail executives, as well as analysis of retail transactions taking place in the prior 10 years, the report outlines five strategic directions M&A will follow in 2016 around consolidation, where growth can be found, the direction capital is taking, where to place big bets and what challenges will face private equity firms.
“Despite the expectation that 2016 will yield a similar level of deal-making, the M&A picture isn’t so simple,” said Bob Haas, A.T. Kearney partner, leader of the Chicago-based firm’s global M&A practice and co-author of the report. “The confluence of a number of trends have made it increasingly difficult for some firms to grow revenues and profits. In addition, smaller businesses and some PE firms are finding access to financing more elusive.”
That said, several trends support the forecast that 2016 dealmaking will be on par with 2015. High liquidity in the markets remains for most companies, with ongoing near-zero U.S. interest rates and cost of capital remaining low for the right borrowers: investment-grade companies. Another trend cited in the report is that corporate executives will continue looking to M&A for earnings per share growth, as other levers appear limited due to modest organic growth opportunities and exhausted share buyback programs.
“Going forward, the market appears to be more balanced and rational, as corporate and PE buyers pay top dollar for high-quality companies and lower valuations for riskier targets,” said Bahige ElRayes, A.T. Kearney principal and co-author of the report. “Buyers and sellers that recognize this changing dynamic will be well positioned to find opportunities and conduct transactions at a fair price.”