M&A Momentum Continuing into 2022: Three Things to Know When Negotiating a Deal in Today’s Market

2021 was a record year for merger and acquisition (M&A) activity, and while 2022 may not be another record year, the market remains strong, fueled in part by continued private equity fundraising and excess cash on the books of strategic buyers. Despite projected interest rate increases, forecasts from Refinitiv, one of the world’s largest providers of financial markets data, put M&A market growth as high as 10% this year. And, according to Ernst & Young, 60% of U.S. CEOs plan to actively pursue M&A this year, up from 47% in 2021.

KO Partner Jennifer Rosenthal recently sat down with Denver Business Journal to discuss her predictions for 2022. We also asked her to share her advice on some recent trends that businesses considering M&A activity should be aware of to navigate today’s fast-paced, rapidly-evolving deal climate.

The most significant pandemic-driven change may be here to stay.

The fallout of COVID-19 has had a number of impacts on how we do business, making telework and video calls the norm. It has brought some surprising impacts for M&A deals, too.

According to Rosenthal, there’s no longer several weeks of on-site vetting and due diligence in many instances, as timelines for these trips have decreased or in some cases shifted to entirely virtual. “Virtual technology has made the process a lot more streamlined. Everyone’s gotten more comfortable with this shift, and some sellers are even using it to their benefit to accelerate the process,” Rosenthal explained.

The result: deals that are made faster, with less in-person time. This is a pandemic adaptation that might be here to stay, as experts predict a “structural decline” in work travel is expected to last into at least 2025.

Cybersecurity and data privacy are more important than ever. 

Data breaches are, unfortunately, on the rise. The first three quarters of 2021 alone saw 17% more data breaches than the entirety of 2020, a trend that shows no signs of slowing down.

With such high incidence rates and increasing regulation around data privacy, it’s easy to see that cybersecurity and data privacy impact nearly every business in operation today, particularly those in tech. It’s also easy to understand why acquirers are increasingly focused on vetting the policies and practices of targets they are seeking to acquire.

Calling this an “area of high risk,” Rosenthal explained that it’s becoming significantly more important that businesses seek advice on these subjects and follow the best practices. Security and privacy issues not properly managed by a business could be expensive to fix — and expose the seller to significant risk  in connection with the transaction.

Despite these changes, the fundamentals remain the same. 

Even in today’s fast-moving, complex deal market, companies should first focus on building a strong foundation, with a consistent and recurring customer base and proven growth. “There are plenty of willing buyers. I would focus on creating a good company,” Rosenthal explained to the Denver Business Journal.

When pursuing an M&A deal, it’s important to also know what you want. As Rosenthal recently shared, “Are [your goals] financial? Or are there other factors that may be more important to your businesses? For example, many sellers prioritize the valuation of their company above all else. But some also feel strongly about minimizing the amount of time they will be required to work for the buyer after closing, while others care most about the requirements not to compete or how employees will be compensated after the close.” Knowing the answers to these questions (and sharing them with legal counsel) on the front end will help to ensure deal terms are tailored your company’s specific needs.

Even in today’s sellers’ market, it can be hard for business owners to know when the time is right to pursue a deal. According to Rosenthal, “Don’t rush to do it if it’s not the right time for you. But, if it is, now is a good time.”

Additional insights from Rosenthal on negotiating M&A deals are available here, and include taking a practical, measured approach while working with legal counsel that will get to know your business in and out.

Jennifer Rosenthal is a corporate partner in the Boulder office of KO. Jennifer’s practice focuses on corporate transactions, including mergers and acquisitions, venture capital and private equity investments, and company formations.