According to Bain & Company’s 2024 M&A Report, “we expect to see more deals get done in 2024—if for no other reason than there are a lot of assets that should trade. We call it the ‘Big Backlog.’” This phenomenon, characterized by a significant accumulation of postponed deals and pent-up demand resulting from economic disruptions and volatility, is expected to play a pivotal role in shaping the trajectory of M&A in the coming years. This article dives into the implications of the 'Big Backlog' and how it will influence the landscape of M&A activity moving forward.
Understanding the 'Big Backlog':
The 'Big Backlog' refers to the substantial collection of postponed M&A deals that have been delayed or put on hold due to various economic uncertainties, including the pandemic, geopolitical conflict, inflation, interest rate volatility, and regulatory challenges. These factors led to low valuations, and as a result, sellers decided not to sell. This created a backlog specifically of aging private equity portfolio companies that have delayed coming to market, but need to. Additionally, corporates have held on to non-core assets that they have delayed selling, which should be divested or sold off as well. As a result of slow transaction activity, private equity dry powder rose to a record $2.6 trillion in 2023. The resulting reservoir of potential deals awaiting execution paired with investment firms flush with capital they need to deploy, makes for an exciting recipe that will drive a significant surge in M&A activity once economic conditions stabilize.
Impact on M&A Dynamics:
The presence of this backlog is expected to have a profound impact on M&A dynamics in the future. As economic uncertainties dissipate with lower and more stable interest rates, and confidence in the market rebounds, businesses will be compelled to address the accumulation of postponed deals, leading to an increase in transaction activity as buyers and sellers reenter the market. This surge is likely to result in increased competition for attractive targets, driving up deal valuations and multiples and intensifying the overall M&A landscape.
Sector Implications:
Different sectors are expected to experience varying effects of the 'Big Backlog'. Industries heavily impacted by the pandemic, such as travel and hospitality, may witness a flurry of M&A activity as companies seek strategic partnerships to navigate the post-pandemic landscape. Additionally, sectors poised for growth, such as technology and healthcare, could see heightened M&A activity as companies look to capitalize on emerging opportunities and consolidate their market positions.
Challenges and Opportunities:
While the backlog presents significant opportunities for businesses seeking to engage in M&A, it also poses challenges. The uptick in deal activity will lead to increased competition especially for good businesses, leading to inflated multiples and making it more challenging for buyers to compete.
Utilizing the Sale Leaseback as a Competitive Advantage:
Amidst the expected increase in competition for good business assets, companies can leverage sale leaseback transactions as a strategic tool to unlock value and gain a competitive advantage when bidding on businesses with owned real estate components. By leveraging sale leaseback transactions, acquirers can outcompete their peers, generating spread from sale leaseback transactions that can help replace required equity, boosting returns and reducing their effective acquisition multiples by spinning out real estate at accretive cap rates. Having a sale leaseback strategy in the tool belt allows sponsors to further sharpen their pencils in the bidding process to potentially outbid their competitors when looking to acquire new target companies. This will be even more important as competition heightens for quality assets in the market and buyers need to think creatively about how they will differentiate.
Conclusion:
As we look ahead to the future of M&A, the 'Big Backlog' will present a defining factor that will shape the transaction landscape at least for the next few years. By adopting a strategic and proactive approach, sponsors can position themselves effectively against their peers in bidding processes by leveraging creative financing strategies and taking advantage of creative opportunities for value-creation. Honing in on the sale leaseback strategy as a competitive angle in M&A processes can set buyers apart in a dynamic and competitive market environment.
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