The Retail Mergers And Acquisitions That Can Get Done Now

In 2022, a majority of economists we spoke with predicted a recession within a year. But when you talked to CEOs, they all said the same thing: “I don’t see it. Business is good, orders are good, prospects are good.”

Now the world’s a different place. Economists are predicting a recession again but the reaction from CEOs is not your 2022 reaction. When you listen to them plan, they talk about cutting marketing budgets and reducing staff. For reasons I don’t understand, no one seems to be using the word “recession,” but when you say it to them, they agree that’s what they’re planning for.

How The Deal Environment Changes When The Economy Changes

Investment bankers love selling companies with great growth and great margins. Those are the most desirable companies and the process of selling them is the most competitive of all sale processes. There are more buyers for companies with high growth and margins than there are for any other type of companies. Those companies get the highest valuations.

But in a recessionary environment, it’s different. Far fewer companies can keep their performance up and buyers don’t pay the same high prices they pay during times of economic growth.

What Drives Mergers And Acquisitions

One thing drives mergers and acquisitions: confidence.

When buyers feel confident, they want to acquire and they’re willing to pay more for what they think is an opportunity. When they don’t feel confident, there are fewer buyers willing to buy, those that want to buy something will only consider opportunities that are closely aligned with what they already know and they will pay less than in better times.

So you don’t see those great companies with great margins and growth getting sold in a recessionary time mostly because they just can’t get the price they want and they’d rather wait.

When The Recession Comes

So who goes into the market to sell their company during a recession? Companies that have to.

It isn’t necessarily that they have a bad business, but they may be in an unexpected squeeze. That may have to do with a bank that has lost the confidence to continue lending or a business that’s about to run out of cash and can’t raise more because times are tough.

That’s the environment that we’ve just entered. Confidence is low, investors are more risk-averse and buyers won’t pay as much.

What Gives It Away

In our firm, we can tell what kind of environment we’re in by the types of unsolicited email and calls we’re getting. In a normal environment, we get a lot of inbounds from private equity groups who want a jump on the next company being sold.

We’re getting fewer of those emails and calls right now.

What we get now are from companies and investors with strong balance sheets that want companies that need cash. Often, but not always, they are strategic buyers looking for something in a financially weakened position in a business they know so they can integrate it and cut expenses. But sometimes they’re just investor groups.

Those are the deals that can get done right now. They’re opportunistic and they are typically a strong balance sheet acquiring a weaker balance sheet.

The prices are not going to be high. The key to getting the best possible price is to create a competition. If you have a weak balance sheet and you’re talking to only one buyer, they smell blood in the water and they won’t pay a lot. If they believe there’s competition, they will pay more.

You can bluff to try to convince a buyer that they need to pay more but when the survival of a business is at stake, sellers are usually reluctant to bluff. The best way to make someone pay more is to really have an alternative.

What Makes It More Complicated Right Now

Every down cycle is different but this one is particularly challenging for retail and consumer companies especially because of tariffs.

It isn’t just that business is weaker, although it is, it’s that the way companies do business has changed dramatically in a very short time. It’s going to take years for companies to adapt and most consumer products, especially apparel, accessories and toys, are never going to be made in the U.S. The price increases we’re seeing now may be permanent.

No one knows what the implications of the current volatility will be on consumer demand and consumer psychology. Also unknown is how the inevitable inflation will impact consumers and what the new supply chain will look like. All that uncertainty makes it harder for buyers to know what a company is worth.

One Exception

There are very few exceptions to downdraft that the market is experiencing right now: One of those is domestic producers. There are some, very few but some, consumer product companies with domestic production in whole or in part. Those companies have become more valuable now.

Motivation

What determines whether a company can be acquired in any environment depends on the motivation of the buyer and the seller. Of course everyone is motivated by making more money but that’s only one part of the motivation. Usually, they have some other strategic reason for doing the transaction or certain elements of the transaction and figuring out what motivates people is the unlock to getting mergers and acquisitions completed.

In this kind of economy, motivations change and that’s what’s driving deals now.