As we begin the second half of 2024, a certain degree of economic uncertainty continues. Several worse-than-anticipated inflation reports have prompted talk of stagflation, and market expectations have been lowered regarding the potential for multiple interest rate cuts from the U.S. Federal Reserve. Fed Chairman Powell has indicated that the Fed remains committed to lowering annual inflation to 2% from its current annual rate of >3.5%.

In 2023, recession fears, high interest rates, and low EBITDA multiples caused M&A activity to slow dramatically. Many companies have simply chosen to wait for better conditions. For Q3 and Q4 of 2024, we remain optimistic that interest rates will decline and spur increased M&A activity.

Another factor driving a potential M&A rebound is the significant amount of money that has been raised and is just sitting on the sidelines. Private equity firms raised a lot of cash in 2021 and 2022, for example, and they still haven’t put it to use.

We expect the ongoing consolidation trend to continue in the highly fragmented adhesives and sealants industry, which consists of a handful of large multinationals and hundreds of small- to mid-sized companies. Financial investors are attracted to this target-rich environment and are looking to capitalize on access to innovation, geographies, and channels as they consider their potential acquisition targets.

Combined with declining interest rates and other positive economic trends, all of these factors set the stage for an active second half in 2024. A positive economic environment is only part of the equation, however. Optimal execution throughout a merger, acquisition, or divestiture is necessary to achieve the best possible deal and position your company for future success.

Optimizing Your M&A Strategy

Whether you are targeting a buy-side (your company is making the acquisition) or sell-side (you are selling all or part of your business) transaction, preparation is truly vital. Your business and M&A strategies must be fully developed at the onset, and the process itself is a complex undertaking that requires significant amounts of time and effort to achieve the best possible deal.

In truth, you may find M&A planning and execution to be a drain on your internal resources. Many companies have chosen to optimize the process by partnering with a third-party firm, particularly one with extensive specialty chemicals expertise such as ours. Teams with experience across business strategy, manufacturing and operations, and technology development work in concert to develop and execute an often multi-pronged approach in support of your specific M&A goals.

Let’s first consider a buy-side scenario. When looking to make an acquisition, it is essential to begin with a fully developed business strategy already in place. This information directly informs your acquisition strategy, the goal of which is to plug the gaps in your strategic roadmap.

For example, business strategy work may have uncovered challenges with expanding your company’s regional focus or an inability to enhance your existing technologies. Only when those gaps have been identified and understood will it be possible to target attractive acquisition candidates and determine how they would fill the gaps were they to be acquired.

The benefit of experience and deep relationships in additional steps, such as deal sourcing (i.e., pursuing those target companies and convincing them to come to the table) cannot be overstated. Longstanding connections and expertise within the industry support the process by ensuring:

• Acquisition targets are well-placed and amenable to discussion
• Potential synergies are uncovered, understood, and highlighted
• Market comparables are identified and analyzed

On the sell side, particularly for small- to mid-size enterprises (SMEs), improving your company’s bottom line is vital. Every dollar of savings results in a multiplier effect for the enterprise value. Subject matter experts with experience in manufacturing operations will work with you to analyze and improve your end-to-end processes, whether in production, supply chain management, environmental health and safety, sales and marketing, and so on. Optimizing efficiencies and improving productivity drop dollars directly to the bottom line.

Keep in mind that intrinsic value and strategic value both contribute to the positioning of the business during the valuation process. Intrinsic value includes your company’s inherent value based on current operations and growth potential, as well as the total addressable market (TAM), while strategic value takes into account synergies and diversification potential (see Figure 1).

Numerous strategies can help optimize the strategic value of the business to, for example, uncover target growth markets, demonstrate the total addressable market, and identify industry trends and customer dynamics. By fully understanding your company’s existing technologies, technical capabilities, and pipelines, our team can help you better focus on the most attractive markets and the best pipeline for new product development and innovation.

Size Matters

While we anticipate that M&A activity overall will rise, your strategy will most likely vary depending on the size of your company. Despite the economic uncertainty of the past several years, we still saw large-scale acquisitions by sizeable public and global multinational companies in the CASE sector. Lower multiples do not tend to deter these big transactions as much as smaller deals because 10x vs. 11x EBITDA is often a drop in the bucket in terms of the total transaction and size of the players.

These larger organizations are refining their M&A strategy in 2024 by increasingly looking to realign their portfolios. They are analyzing their businesses, looking deeply at strategic assets, and deciding what non-strategic elements could be shed. After these divestitures are complete, they will have cash available to make more strategic acquisitions in the future.

In contrast, SMEs generally have had a much more difficult time in terms of M&A opportunities. In addition to the high interest rates, the relative effect of lower multiples is felt much more deeply by this group. The difference between 7x and 8x EBITDA could translate to several million dollars, potentially a much more significant impact for companies in this size range compared to the large multinationals.

As 2024 progresses, SMEs will continue to keep a close eye on the economy and hope that their business is able to demonstrate growth. For those that see improvements to the point of being in a position to sell, the latter part of the year is likely going to be the timeframe when they look to act.

Partnering for Profitable Growth

Whether you are looking to buy or sell as the second half of 2024 progresses, the most important thing to keep in mind is that patience and preparation are key. Your goal should be to achieve the best possible deal, and those don’t just fall from the sky.

Our collaborative teams of subject matter experts with decades of experience across the value chain can work synergistically and hand-in-hand as strategic thought partners alongside your internal M&A personnel, advising on strategy, valuation, potential synergies, market comps, and so on. In addition, the team conducts due diligence on all aspects — from manufacturing and technology to market and commercial issues — and shepherds the process all the way to a successful closing.

With positive economic trends, readily available funds, and lower interest rates on the horizon, we are optimistic that 2024 will bring a rebound in M&A activity. Is your company ready?

To learn more, email the author at dmurad@chemquest.com or visit https://chemquest.com.