In the financial markets, the fear of new variants of COVID-19 has transitioned seamlessly in recent months into fear of ever higher inflation and its consequences for the economy. And then suddenly there is the war in Ukraine. What does all this mean business valuations and the ease with which companies can be sold? Few. At least, for now. History shows that economic growth and M&A go hand in hand.
And the good news is…
Let's mention the good news first – you'd almost forget it with everything that's been happening in the world these last few weeks. With the arrival of the Omikron variant of COVID-19 (in combination with all kinds of medication and treatments), the crisis surrounding Covid-19 largely to the past to belong. Who would have dared to hope that half a year ago?
The sudden reduction in the threat of COVID-19 is common to most business sectors quite positive. Although it is difficult to estimate the exact size of the economic profits (there has not been a comparable crisis in modern history, for example), almost all economists have expressed positive expectations for 2022. The European Commission forecast economic growth of 4.0 percent for the entire European Union in February. In a historical perspective, that's a lot.
Inflation means bad news
However, these growth figures now seem out of reach. Apart from the good effects of the reopening, the news for the economy is dire and angry – not to mention the war in Ukraine in the first instance. Take the inflation numbers first. Inflation (also known as depreciation) is high: more than 6 percent in the Netherlands in January. Inflation is also high in the rest of Europe and in the United States.
Now I am not a macro-economist, but I do know that (very) high inflation in particular is bad news for economic growth. While a little inflation is actually quite good for the economy, high inflation is dangerous. When there is high inflation, products and/or services quickly become much more expensive. That means you and I can buy much less for the same money. We will then make choices and purchase fewer products and services. So the economy can shrink.
One of the causes of inflation is particularly important. Due to the reopening of the economy, the demand for energy (gas, oil, electricity) is increasing sharply. This has led to energy price increases for several months. Those price increases are, if possible, passed on to their customers by the customers of energy companies. The result: price increases in all kinds of categories. Other raw materials, products and services are also becoming scarcer and more expensive.
War in Europe
The war between Russia and Ukraine is fueling further price increases. Oil and gas prices are rising fast (because supply from Russia is being avoided), but so are the prices of nickel and aluminium (also from Russia) and from grain (from Russia and Ukraine) are growing out of control.
The result: while economists started the year optimistically, they are reducing their expectations for economic growth. Beginning of March Rabobank lowered its growth forecast for 2022 to 3.1 percent and for 2023 to 1.2 percent. Those are still respectable growth figures, but compared to the earlier expectation of 4.5 percent growth for 2022 and 2.9 percent for 2023, there is a significant decrease.
A dream exit is still possible
Suppose you are considering your to sell company. Should you reconsider now – now that the economy is clearly entering more difficult waters? At the moment, perhaps the opposite is true. For the time being, there is talk of a seller's market – especially when it comes to technology companies. In its annual Dutch M&A Predictions report, edition 2022, writes Dagmar Enklaar of consultancy firm Deloitte: 'The conditions for sellers are ideal to make large profits.' She points out that both strategic buyers and buy-out funds (private equity) are particularly active.
In addition, more and more foreign investors are finding their way to the Netherlands. These are trends that also come back in the biennial Brookz Acquisition Barometer, edition H2 2021, and which I also endorse. To this day, the hunt for companies is in full swing.
How's it going?
The question is now: will the music stop? It's hard to predict. It can be argued that it can do no harm if the acquisition market slows down a bit. If company valuations rise too high, buyers become hesitant and demand for companies threatens to disappear. So in that respect it won't hurt if economic growth slows down a bit.
It will undoubtedly be a different story if the economy enters a period of contraction. The psychology of corporate buyers is known to be very optimistic to buy when the economy is doing well and to sit on their hands when the economy is going down. That is not necessarily very logical (in economically difficult times there are bargains to be had) - but it is how it works.
Until further notice, now is the time to go for one dream exit.