Capitalizing on Market Opportunities With M&A

As boards and management teams look to the second half of 2024 and beyond, one trend to watch is whether deal activity accelerates across sectors.

Global merger and acquisition (M&A) volumes jumped more than 25 percent year over year in the first quarter of 2024, according to Dealogic data. Anticipated interest rate cuts toward the latter half of 2024, pent-up demand among potential buyers and sellers after slowed M&A activity over the last two years, and increased interest in the use of M&A to accelerate the adoption of technology may all spur dealmaking throughout the year. 

Though headwinds such as sustained inflation and geopolitical uncertainty could continue to delay some strategic plans, the increased stability of today’s economic environment and an upbeat outlook present good opportunities for companies and boards to look at their deal readiness. Doing so will allow their management teams to take advantage of a more deal-friendly environment and capitalize on opportunities to transform their business, whether through increased scale or market share, absorption of new technologies, or entry into new markets or sectors. Directors play a critical role in reviewing, evaluating, and guiding the companies they serve through transactions.

Below are some actions directors can take as their businesses approach acquisitions in the current environment.

Ask the right questions. The most important questions management teams and boards should consider about a potential transaction are: Why this deal, and why now? As succinct as they may be, these two questions crystalize the rationale underpinning a potential acquisition. Moreover, these questions help identify why a particular deal makes sense from a company and stockholder value perspective. 

To answer these questions, management teams and boards should work together to closely consider the drivers behind a deal, what they find compelling about a target company, and how the decision ties back to the company’s strategic plan. Evaluating how a deal fits into strategic planning requires management teams and directors to look closely at how the deal addresses key goals in that plan for the company, such as achieving greater market scale, entry into a new industry or geography, or acquisition of new technology. For example, a company looking to acquire a biopharmaceutical firm will want to critically assess timelines for approvals of drugs and other key products, the process for bringing these key products to market, and any regulatory or other obstacles to approvals.

Identify the key risks. There are challenges with any potential acquisition, and some, such as antitrust concerns, should be anticipated regardless of a company’s industry or location. But there are also other hurdles that may be less common across the typical deal, such as national security concerns or industry-specific regulatory approvals from agencies such as the US Food and Drug Administration. A deal pending beyond its announced timeline for completion is a risk itself as it creates uncertainty around the target company’s value due to potential departures of key personnel, clients, or suppliers and can cause its performance to suffer.

Directors play an important role in understanding risks and ensuring their management teams are ready to anticipate, prepare for, and mitigate potential issues. In addition to knowing the conditionalities related to a potential deal, management and directors should consider their top potential concerns related to the transaction to uncover hurdles in advance and take steps to address them. There should also be clear explanations of how a transaction is being financed and valued prior to a deal announcement. Additionally, the rationale for the deal should make sense to the stockholders and the broader market and be well-understood by management and the board. 

Understand the realities of a deal-friendly market. It’s helpful for directors to acknowledge that today’s market might look quite different from the economic environment in which their companies last completed a transaction. They should understand that while there are commonalities across deals, each transaction is unique and should be evaluated on its own. In a deal-friendly market, sellers may have more of an advantage simply because more transactions are occurring. Thus, companies and boards may need to streamline their decision-making timelines to accommodate a hotter market. This is not to say that they should take shortcuts, but there may be a need for more aggressive engagement to close a deal.

Keep the big picture in mind. Whether the business has pursued an acquisition for years or is just surveying the market broadly, it is part of directors’ obligations and duties to help keep the business focused on its long-term strategic plan. They should evaluate each deal opportunity by how it helps the company grow and achieve its big-picture goals, harkening back to the questions boards should start with: Why this deal, and why now? 

As businesses look toward a continued uptick in M&A activity, directors must remain engaged. By preserving strong, open lines of communication with management and advisors, directors can successfully work in tandem with management teams to help their companies take advantage of opportunities afforded by a deal-friendly climate.

Paul Weiss is a NACD partner, providing directors with critical and timely information, and perspectives. Paul Weiss is a financial supporter of the NACD.

Kyle Seifried is a partner in the M&A group at Paul, Weiss.