Don’t Count On M&A To Bail You Out

Don’t Count On M&A To Bail You Out

CEOs and Institutional Investors should not count on strategic acquirers or PE firms to bail out underperforming stocks (or private company holdings for that matter). Not only is the cost of capital significantly higher for would-be acquirers, but target company revenue and profitability forecasts have substantially less visibility and therefore more risk today than they did six months or a year ago. These two factors combined with the fact that the macroeconomic backdrop is likely to get worse before it gets better means would-be acquirers will be significantly more reluctant to engage in M&A discussions today versus a year ago. In addition, few target companies will be enthusiastic about accepting valuation haircuts. Generally speaking, target companies will need to feel more pain for an extended period of time before they will be willing to accept valuation haircuts. This is a difficult environment to get M&A deals done as few deal participants will be able to agree on valuation.