The M&A space is dynamic. It regularly moves through fluctuating phases, shifting from a highly opportunistic market to a more challenging one. In these phases, the pathways toward deal closure may be direct, with high valuations leading to successful closes, or they may require more twists and turns to arrive at their intended end.
Fluctuating conditions can be attributed to several factors. Market turbulence and high interest rates reduce deal count and frequency. Geopolitical uncertainty makes it harder for investors to set up cross-border deals and pin down and make long-term asset value assessments. In addition to these uncontrollable factors, dealmakers across jurisdictions may face increased regulatory scrutiny. In the US, for instance, regulators closely monitor ownership structures in some transactions and require disclosures about acquiring parties.
Despite turbulence dealmakers may encounter, there are always reasons for optimism. Economic outlooks improve, interest rates fall, and inflation stabilizes. In these moments, deal timelines and volumes pick up, which signals renewal in the M&A space.
In dollar terms, the first half of 2024 saw $275 billion in average monthly M&A activity, an increase of over $265 billion from the previous year. In Canada, two significant deals occurred in 2024, and deal counts rose from 603 in Q1 to 663 in Q3. Deal counts are showing significant growth in the US and Europe as well – up 14% and 22%, respectively. By these measures, M&A is on the rebound.
Momentum is accelerating, but the market is still cautious, and targets take longer to identify. With more tentative moves being made, transactions are taking longer to set, scrutinize, and finalize, and they’re vastly more complex.
With so much effort and analysis required up front, it’s even more critical that deals go through. To raise the chances of sealing the deal, today’s dealmakers are building creative deal structures, innovating with value creation techniques, and doubling down on comprehensive due diligence. They’re adopting creative dealmaking strategies to close the valuation gap, mitigate risk, and put deals on the table that satisfy both parties optimally.
Creative Dealmaking Trends: New Deal Structures for an Evolving M&A Landscape
One of the trends shaping the M&A field is a shift in who’s buying. Amidst fluctuating interest rates and regulatory scrutiny, financial buyers decreased and gave way to corporate buyers. These buyers are more realistic about deal valuation, and their priority is to generate ROI for investors. Even as interest rates drop and regulations ease, these corporate buyers have influenced seller-side activity, opening doors to new partnerships and a range of new and more complex and creative deal types, including:
- Strategic partnerships: Companies are joining forces to navigate challenging fundraising climates. They seek partnerships with startups or research branches in the same industry to build value through shared resources, assets, and synergies. Pharmaceutical companies, for instance, are teaming up with biotech and biological and medical research startups.
- Carve-outs: This strategy sees buyers acquiring a specific asset (or assets) of a large company instead of acquiring the entire company. Economic circumstances have compelled many organizations to divest non-core assets. When those assets merge well with the acquirer’s existing portfolio, the right deal structure is a win-win.
- Bolt-ons: In this case, a larger company acquires a smaller one in a similar line of business to scale business (sometimes in a new territory) and advance its position. Bolt-ons let private equity firms add value to their portfolio companies without taking on significant debt.
- Secondary buyouts and liquidations: The economic challenges that slowed M&A activity created bankruptcy conditions for some and the need for others to cash out quickly. With valuations dropping among tech startups, for example, more activity is expected in this space.
Buyers and sellers are getting especially creative with lower and middle-market deals. These transactions are driven by owners at retirement age looking to sell. For many, building a business has been a labor of love. These owners are less motivated by ideal market conditions than by their unique exit plans and expectations, leading to creative opportunities on both sides of the table:
- Earn-outs: In this scenario, the seller accepts lower cash up front in exchange for back-end down the road if the business meets a certain performance threshold. This type of deal lowers risk for the buyer, retains talent, and keeps the former business owner engaged, stabilizing and adding value to the transition. Earn-outs started gaining popularity in 2023 alongside other complex deal structures, which we reported on in our M&A Fee Guide 2023-2024.
- Equity retention: This strategy allows owners to remain in the deal structure and benefits from their continued expertise. It narrows the valuation gap by incentivizing the owner (or management team, through an equity incentive package) to keep creating value for the company.
Moving Beyond Finances with Creative Value Creation
In the past, private equity firms focused on monetary value and generated profit primarily through financial strategies. Financial analysis optimized prices and managed talent to generate the maximum deal valuation for a transaction.
Recent M&A challenges are inspiring value creation strategies instead. Looking beyond finances, private equity firms differentiate their assets according to new criteria and elevate value across their portfolio. Making deal valuations more attractive or assessing potential targets means identifying opportunities to add value more indirectly.
Technology is a primary point of focus. Dealmakers are examining how Artificial Intelligence (AI) can impact the business model. Sell-side businesses are finding ways to use generative AI and hiring personnel with the skills to optimize using it. Environment, Social, and Governance (ESG) factors also hold considerable weight and have led to organizations considering more sustainable practices and innovations. Some are creating value by reducing their real estate burden in favor of remote work.
Other priority areas include sales and marketing, supply chain optimizations, and strategies to expand the customer base. Value creation might put a premium on an asset’s strategic importance or potential market value due to talent management capabilities, planned customer service enhancements, or operational improvements. Value creation demands creative thinking supported by robust research and analysis and an actionable roadmap.
Pre-sale Preparation and Due Diligence
At the heart of any creative dealmaking strategy is preparation. As asset managers and private equity investors proceed with increased caution, thorough diligence can be key to overcoming a mismatch in valuation. While this is a larger upfront time investment, it strengthens the deal and increases your chance of closing it successfully.
M&A advisors pursuing deals must also build more time for regulatory due diligence. In the US, for instance, a regulatory update requires dealmakers to submit a form for antitrust review on acquisitions over $119.5 million. According to the Federal Trade Commission (FTC), that requirement could add up to 120 hours of additional workload, with an average of 68 hours of extra preparation needed.
The way to ensure a smoother diligence process is to set up and prepare your data room early. Starting the diligence process earlier lets you think through the transaction structure to identify opportunities for value creation. Conduct a strategic review of the portfolio, looking for underperforming areas that need optimization. Prepare draft merger agreements and other documents ahead of time. Ensure all the historical, financial, and market-related data and projections are supported with credible documentation.
Successful deals are built on trust, which stems from an open and honest diligence process. Parties and their advisors need to know every aspect of the deal. As you work to get buy-in, everyone will carefully analyze the documents and history of the organization or asset. How much confidence is instilled when the document review process is simple and seamless can’t be underestimated.
Your Virtual Data Room (VDR) is key. It’s the mission-critical information hub that serves as a touchpoint for every stakeholder. It’s the secure storage vault where you organize and share large volumes of confidential documents. To set up your room early and create an efficient workflow, you need a data room with an intuitive interface that allows for maximum flexibility. You need a data room that offers high security, high SLA, and design features that let you streamline your internal process and document review for investment committees, boards, and other stakeholders.
Firmex is the leading VDR in M&A. The interface is intuitive, making it easy for teams to add and manage documents, control access, and monitor room activity. The platform is professional, powerful, and secure, with maximum uptime and bank-grade encryption. Customer service – with real humans providing expert advice – is available 24/7/365 to answer questions and troubleshoot.
Unlike other VDRs, Firmex offers a subscription model with unlimited rooms and users. This gives M&A advisory teams the flexibility they need to handle today’s extended deal times and run multiple concurrent deals in the most cost-effective way.
Deal Completion Starts on Day One with Effective Due Diligence
Creative dealmaking increases complexity and the length of deals. Whenever the timeline is extended, there’s a greater chance a deal will unravel.
Along the way, you may face several rounds of purchase price renegotiations. Valuation misalignments may require additional review and deal restructuring. Regulatory requirements are already adding a burden of diligence, but new legislation and industry standards might emerge while a deal is being processed. Another deal might impact your deal’s terms or ownership structure and require new disclosures, adjustments to financial statements, or other documentation. Proper diligence is even more critical when timelines are less of an issue, such as in a competitive auction process.
Successful dealmakers already know how critical due diligence is to the dealmaking process. As market conditions fluctuate and new challenges arise from varying sources, it becomes even more essential through creative dealmaking. In these strategic transactions, diligence from day one can make all the difference.
Discover how to optimize the due diligence process to inspire confidence and get results. Book a demo to learn more about the Firmex VDR and subscription model.
