Mergers and acquisitions (M&A) present companies with myriad opportunities for growth and transformation. However, market volatility and uncertainty from the Ukraine war, increased regulatory scrutiny, rising inflation and interest rates, and supply chain issues all complicate the process and have led to a recent decline in global M&A.
Even so, with patience and the proper preparation and approach, companies can continue pursuing their strategic M&A goals whether they are seeking scale, larger market share, diversification, or new technologies. Extensive opportunities remain for those who shift their thinking, adapt to this new ambiguous reality, and keep a long-term view. And board members, with their understanding of the nuances within the company and the high stakes that come with a deal, are well-positioned to guide the companies they serve through transformative events such as M&A, even when markets are unpredictable.
Below are some considerations that board members should keep in mind as they evaluate and execute transactions in this environment:
Anticipate a longer deal process. When markets are rising (or at least stable), it is typically much easier for companies to agree on M&A terms. Deals are, of course, still done during times of volatility, but deal valuations and modeling get more complex due to their dependence on market pricing. Deals may involve stock considerations. Even cash deals may be affected because buyer access to credit markets may be based on stock valuations. Even if the transaction involves private assets, valuations may look to public company comparables.
Separately, added scrutiny from antitrust regulators will mean that deal terms related to such approvals will be more complicated to negotiate and the approval process itself will be lengthier. Given this, boards should anticipate a longer timeline and more fits and starts than a typical M&A process in a stable or up-market environment.
Look for flexible and creative solutions. A number of pricing mechanisms can help account for market volatility. For example, if using stock considerations, instead of basing the exchange ratio on the closing price on a particular day, the average stock price over a more extended period will reliably flatten out any large spikes or dips in the price. Companies can also turn to a floating exchange ratio, which adjusts based on the market value to a certain extent. Although floating exchange ratios are rare due to the risks to both sides, they could be beneficial in a volatile market. Other pricing options, such as contingent valuation rights and earn-outs, may also help—depending on the target and circumstances.
Tapping more deeply into the breadth of experience that bankers and lawyers have in addressing these changing dynamics will help determine if any of these more novel techniques fit the situation at hand. While a company may be used to doing deals one way, keeping an open mind to alternative structures may help during this time.
Understand the unique risks involved. Going into deal negotiations, companies should understand whether the factors leading to market volatility could affect the deal in particular ways. For example, is this a cross-border deal that may be more affected by the Ukraine war or Russian sanctions? Do deal parties need to add more due diligence, closing conditions, or termination rights to address these specifics? Boards should work with their management and advisors to fully understand such provisions.
Focus on the long-term strategy. Notwithstanding the foregoing, while market fluctuations add complexity to M&A deals, boards should keep an eye on the long-term reasons for why they are pursuing a particular deal and not necessarily be distracted by the ups and downs of the current market. Boards can also take this time to fine-tune corporate strategy and understand the business better so that they are ready to strike when the market turns their way.
As the global economic and geopolitical situation evolves, the board will continue to play an important governance role. With the help of their advisors, shrewd and imaginative directors are well-positioned to navigate the intricacies of M&A transactions and successfully steer companies through uncertain times.
Jeffrey D. Marell is the global cohead of mergers and acquisitions at Paul, Weiss, Rifkind, Wharton & Garrison.
NACD: Tools and resources to help guide you in unpredictable times.