Dive Brief:

• The total value of worldwide mergers and acquisitions slumped 23% to $1 trillion during the first quarter compared with the same period last year, restrained by turbulent equity markets and other headwinds, Refinitiv said Friday.
• “The deal-making environment has changed dramatically over the last three to six months, as world conflict, volatile stock markets and economic indicators have clearly caused boardrooms to evaluate the new landscape,” according to Matt Toole, director of deals intelligence at Refinitiv. The total number of announced deals during the first quarter fell to 12,601, a 19% decline compared with the same period last year.
• Yet “the fundamental drivers of deal-making are still the same, with strong corporate balance sheets, historically low interest rates and the continual search for growth and expansion,” Toole said. M&A involving technology, private equity and mega deals remains strong.

Dive Insight:

The number of deals worldwide valued at more than $100 million and completed during the quarter — highlighted by Amazon’s purchase of MGM for $8.5 billion — rose to 220, a 7% increase compared with the same period last year, according to Willis Towers Watson.

Relaxation of COVID-19 restrictions and increasing vaccination provide reasons for optimism among deal-makers looking toward the months ahead, according to Jana Mercereau, head of WTW’s corporate M&A consulting for Great Britain.

High levels of ready cash, low interest rates, and efforts by businesses to upgrade technology and adjust to climate risk and shifts in inclusion and diversity have built “significant momentum driving M&A,” she said.

At the same time, “geopolitical turbulence, increasing inflation, intensifying regulatory scrutiny of M&A transactions and continued supply chain disruption present a number of challenges for companies planning to strike a deal in the months ahead,” Mercereau said.

Russia’s invasion of Ukraine, begun just five weeks before the end of the quarter, darkened the outlook for deals, according to McKinsey.

The incursion “has clearly shifted the mood, triggering not only a humanitarian and geopolitical crisis but also the kind of shock that has served as a caveat when experts try to weigh how long the high levels of M&A might continue,” McKinsey said. The prospect of higher taxes also complicates deal-making plans.

CFOs and their C-suite colleagues who aim to push ahead with a large deal in coming months should know that they have just an even chance of outperforming their industry peers, as measured by total shareholder return (TSR), McKinsey said in another report.

CFOs can improve their odds for success, McKinsey said, by taking four steps:

1/ Pair a big deal with a program of small- and mid-size acquisitions. Companies that pursue a large deal as part of a systematic plan for smaller purchases generated 1% percentage point more in annual TSR, McKinsey said. “They do not allow pursuit of large deals to stop momentum on their programmatic M&A activities.”

2/ Find a good match in corporate culture. Companies can generate 5% more in TSR two years after purchasing an acquisition with a similar culture, including strong talent management, credible external communications and sound internal operations, McKinsey said.

“In large deals that involve a clear cultural mismatch, top talent on both sides may bolt for other opportunities, the base business may suffer and the acquirer may take longer to reap value from the deal — if synergies are achieved at all,” McKinsey said. “Very few companies systematically consider cultural fit before they do a deal.”

3/ Emphasize revenue growth. A study of companies after making acquisitions showed that those that increased revenue generated higher shareholder returns, McKinsey said.

“Senior leaders will necessarily be focused on quickly capturing cost synergies, but if they are not simultaneously monitoring revenues and growth opportunities, they may overlook sources of synergy — and destroy value,” McKinsey said.

4/  Continually reset cost baselines. During integration of the target company, flexibility in determining acceptable and unacceptable costs is essential to outperformance, McKinsey said.

“Companies that are pursuing large deals need to proactively manage their costs — not just to create value but also to avoid downside risks,” McKinsey said. Those that botched an acquisition “couldn’t keep integration costs under control and lost value.”