Global merger and acquisition activity reached a record level in 2021, topping $5 trillion for the first time. Deal making remained strong early in 2022 despite rising inflationary pressures. But that pattern is changing due to multiple variables.
Deals are being affected by the Russia-Ukraine war, continuing supply chain difficulties, and economic volatility, including the recent hike by the Federal Reserve in its benchmark interest rate by .75% in an attempt to curtail soaring inflation.
Potential impacts on deal terms
Due to these challenging factors, economic analysts believe deal terms could see significant changes for future mergers and acquisitions, including:
- Reduced purchase prices: Facing higher operational costs and interest rates, buyers are offering less money to sellers unless they can mitigate the higher cost of doing business by passing those costs along to consumers or reducing expenses. Buyers are also making deals contingent on finding acceptable financing.
- Alternative payments: Although earnouts and holdbacks have been common in deals since the pandemic began, some buyers now are offering even less cash up front and adding more contingencies such as revenue milestones after closing. Uncertainty about the effect of broad market forces is causing buyers to de-risk their pricing models by adding more to post-closing contingencies.
- Increased due diligence: Buyers are also asking for longer exclusivity periods allowing for deeper examination of business performance and pricing arrangements with suppliers and others. This extended scrutiny may lead to provisions allowing buyers to negotiate additional price adjustments based on what they find and changes in the broader economy.
Limiting risks is critical for acquisitions going forward
While sellers were mainly in the driver’s seat during 2021’s record year, buyers are starting to regain control over purchasing terms due to the many factors affecting the world economy. However, sellers are not all acceding gladly or willingly to many of these terms.
During this unpredictable economic period, working with experienced attorneys specializing in complex business transactions is essential. It is invaluable to have knowledgeable lawyers who have guided middle market buyers and sellers through turbulent times and who understand how to spot potential risks and optimize transactions by developing a successful strategy unique to each situation.