Bob the Builder — PE Looks for Further Bolt-on Deals
There is an increasing appetite for bolt-on acquisitions and amid the rise of protectionism in global M&A.
According to the 451 M&A KnowledgeBase, deal volume in May posted an 11% month-over-month decline. The primary driver is that PE firms are pressing the breaks on purchasing assets. The current growth rates signal that the tech M&A market is in for a longer recovery relative to other markets.
In March, I noted the growing count of Bolt-on acquisitions (at the time, 58% of all PE transactions) and how fierce competition over small assets diminished most multiple discounts. Bolt-on deals are done to reduce the purchase of pro-forma multiple.
Normally, premium pricing drives away buyers, or at least forces them to load on more debt; however, debt is less available, and investor committees aren’t currently willing to green-light large platform acquisitions.
What strategy (all things equal) requires less debt and still puts capital to work? Bolt-on Acquisitions.
Yes, PE firms will need to search diligently for discounted opportunities (again, increased competition leading to diminished discounts), but, in the meantime, the capital still needs to be deployed. These purchases, which add smaller assets to sponsor-backed platforms, are likely to become a greater component of PE deal flow in the coming months.
Another noticeable trend is the rise of protectionism. Protectionism is poised to play an increased role in global M&A activity, especially as countries handle the economic fallout of Covid-19. Examples:
•France’s Finance Ministry created a fund for investing in domestic tech companies if these companies receive foreign, unsolicited suitors.
•Australia proposed changes related to foreign takeovers in all industries — regardless of size.
•Germany strengthened its process for screening foreign investments in both Healthcare and AI.
•Hungary and Poland are implementing restrictions on foreign investments.
•The United States has proposed to put a moratorium on large M&A until the pandemic dissipates (“Pandemic Anti-Monopoly Act”).
Ultimately, these initiatives can and will inhibit deal-making in certain sectors across the globe.
Cheers
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Image: Photo by iMattSmart on Unsplash
