Best of LinkedIn: M&A Insights CW 43/ 44

00:00:00: Provided by Thomas Allgaier and Freeness, based on the most relevant LinkedIn posts about M&A Insights in calendar weeks forty-three and forty four.

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00:00:32: right?

00:00:32: And to just sort of set the stage for you today.

00:00:36: our whole mission with this deep dive is to distill real time on-the-ground intelligence from strategy M&A and investments professionals.

00:00:43: exactly.

00:00:44: we want to extract those high signal insights without all the fluff.

00:00:48: so you the listeners stay sharply informed on what's actually happening

00:00:51: out there.

00:00:52: yeah and We've got a lot of ground to cover it Today!

00:00:57: We'll be moving through four main themes.

00:00:59: First, we will hit macro market conditions then valuation and deal structuring which is wild right now.

00:01:05: Oh it really is.

00:01:06: Then we get into integration in hidden liabilities And finally we wrap up with the AI workflow revolution.

00:01:12: Yeah that AI piece is moving so fast.

00:01:15: It is Okay.

00:01:16: let's unpack this.

00:01:17: To understand the current M&A landscape we have to look at the macrosychology of buyers Right Now

00:01:24: The psychology Kind of everything.

00:01:26: Exactly Daniel Friedman at VCG shared this insight that I thought was fascinating.

00:01:31: He pointed out the executives, you know they aren't actually short of capital right now

00:01:35: which goes against The standard narrative

00:01:37: it does.

00:01:39: They aren't short of strategic appetite either But what their lacking is conviction like confidence is improving a bit but It remains highly-highly fragile

00:01:49: fragile as the perfect word for it.

00:01:51: So are we basically looking at a market with?

00:01:53: full tank of gas?

00:01:54: that is just, I don't know too nervous to pull out the driveway.

00:01:57: Yeah

00:01:57: i'd completely agree with that analogy.

00:02:00: it's a highly cautious environment.

00:02:01: but you know there some interesting data from Merlin Pissatelli and Mark Williams that kind of complicates this.

00:02:07: okay what do they say?

00:02:09: well The global M&A market has actually down nine percent this year overall right?

00:02:13: But if you look at data site their deal volumes are up twelve percent.

00:02:17: wait

00:02:17: really how does that work?

00:02:19: its weird right?

00:02:19: yeah in here's Q-three deal kickoffs fell two percent, but the successful close rate actually rose three points to forty nine percent.

00:02:29: Oh

00:02:29: wow!

00:02:29: Yeah and the median diligence time dropped by four days to a hundred seventy.

00:02:33: Okay wait so they have no conviction But their closing more often AND doing it faster.

00:02:38: If we connect

00:02:39: this To The Bigger Picture It Actually Makes Sense.

00:02:42: Jay Patrick Gallagher noted that the market is severely bifurcating.

00:02:46: Hell.

00:02:46: So

00:02:47: Well, the large deals those mega transactions they're facing major exit bottlenecks because of valuation gaps and just you know really selective financing.

00:02:56: but the lower middle market it's incredibly resilient.

00:02:59: That's interesting!

00:03:00: Because there is this stat from Sima Griffith in Taber B Benedict that plays right into that Lower Middle Market Resilience.

00:03:07: Oh yeah?

00:03:07: Yeah They pointed out that private equity isn't just slashing a burning in space.

00:03:12: P was actually involved.

00:03:13: an eleven percent of lower-middle.

00:03:16: Okay, so a decent chunk.

00:03:18: Yeah and PE backed add-ons made up another twenty four percent.

00:03:21: but here's the really wild part.

00:03:23: The data shows that PE backed middle market firms actually outperform their independent peers Really?

00:03:29: By how much?

00:03:30: Well revenue growth was twelve point nine percent for PE backed versus ten point four percent For independence.

00:03:36: That is a noticeable gap

00:03:38: It Is.

00:03:39: And EBITDA margins were thirteen point seven percent compared to twelve point three.

00:03:43: The argument there is that capital fundamentally forces management discipline.

00:03:47: Right, because you have professional boards strict reporting they don't let you just wing it

00:03:53: Exactly.

00:03:53: but because buyers generally lack that macro conviction You mentioned They are scrutinizing deal values harder than ever right

00:04:01: now.

00:04:01: Oh absolutely, scrutiny is intense.

00:04:04: We're just forcing some really creative and sometimes super contentious structuring Just to get deals over the finish line.

00:04:11: Yeah, let's talk about those valuation gaps because Kai Hesselman shared a stark example of this.

00:04:16: I saw that it's crazy

00:04:18: It really is.

00:04:18: he looked at a manufacturing company exact same company right.

00:04:23: the seller Calculated an EBITDA based value of twenty two million euros

00:04:27: okay?

00:04:27: Twenty-two million

00:04:29: and The buyer looked at it and calculated nine point six million years.

00:04:32: That

00:04:32: his just a massive wild gap for these acts in business.

00:04:37: its less than half.

00:04:38: Well Lindsay M Wendler made a great point that explains this, she basically says not all EBITDA is created equal.

00:04:45: Yeah absolutely Right.

00:04:46: like

00:04:47: two businesses could both have say five million dollars in EBITTA but they will command vastly different multiples based on the quality of those earnings

00:04:54: right?

00:04:54: Like recurring revenue versus you know highly concentrated customer bases.

00:04:59: exactly if all your revenue comes from three guys who play golf with a founder A buyer's going to discount that heavily.

00:05:06: So to bridge these massive gaps between what the seller wants and with a buyer will pay, they use earnouts.

00:05:12: The classic compromise?

00:05:13: Right but you have to ask are they even real at this point?

00:05:17: Drew F actually analyzed over one hundred recent M&A deals

00:05:21: And What did he find?

00:05:22: He found that only about twelve percent of total burnout value was paid out to sellers.

00:05:27: Twelve percent.

00:05:29: That is

00:05:29: brutal.

00:05:30: It really highlights how much risk gets pushed onto the seller post.

00:05:33: close

00:05:34: Yeah, I mean look at that dramatic example with PepsiCo and Poppy.

00:05:37: They slash poppies earn out from three hundred million dollars down to just twelve million.

00:05:42: Ouch!

00:05:43: Yeah...that's a tough pill to swallow

00:05:45: Right.

00:05:46: So i have ask are urnouts basically just a polite way for buyers & sellers To completely disagree on price while still you know signing the paperwork?

00:05:54: What is fascinating here Is we're seeing this dynamic even outside standard corporate M&A.

00:05:58: what

00:05:58: do ya mean?

00:05:59: Well Mira Shah brought up UK's proposed founders relief.

00:06:02: Oh right The tax thing.

00:06:04: Yeah, it's a ten percent capital gains tax rate on gains up to ten million pounds.

00:06:09: But the conditions attached to it are so demanding.

00:06:12: she says that feels exactly like a dysfunctional earn-out.

00:06:15: Except you know there is no buyer of the other side to negotiate with.

00:06:18: if you just narrowly miss one metric You just lose relief entirely.

00:06:23: That sounds incredibly stressful for founders.

00:06:25: And Ate Just a quick reminder For you listening If your enjoying this kind of strategic breakdown Definitely make sure you subscribe to the feed so that you don't miss our future deep dives into these exact kinds of mechanics.

00:06:36: For Sure!

00:06:51: Here's where it gets really interesting, because Scheheri Arkan shared this eye-opening case about IFFs massive acquisition of DuPont nutrition and biosciences.

00:07:00: Oh that was a huge deal!

00:07:01: Massive is twenty six point two billion dollars but by twenty three the EBITDA margin was just seventeen point two percent against a twenty six percent target.

00:07:11: That's a significant miss

00:07:13: And It Gets Worse.

00:07:14: Free Cash Flow Was Only Point Nine Billion Against A Two Point O Billion Dollar Target.

00:07:18: Wow Yeah, Brian Dukes actually points out that if you look at the ten scariest M&A deals The mistakes are completely identical whether it's a Ten million dollar deal or a ten billion-dollar deal like that one.

00:07:31: It's

00:07:31: the same.

00:07:31: root causes

00:07:32: Exactly the same.

00:07:33: its culture clashes skipped diligence and just fuzzy integration plans.

00:07:39: He says about seventy percent of acquisitions fail to deliver the expected value.

00:07:42: Seventy percent is just staggering!

00:07:45: Cameron Kinloch shared this really practical CFO framework for evaluating failing acquisitions, like let's say a hundred and ten million dollar deal is going sideways.

00:07:53: What's the frame work?

00:07:55: First you have to brutally separate a bad thesis from that execution

00:07:58: right.

00:07:59: if the thesis actually holds up You have choice either invest more to fix the execution your restructure or just shut it down to avoid the sunk cost fallacy.

00:08:08: The Sunk Cost Fallacy is what traps so many boards, but you know Megan Baker highlighted exactly why execution fails so often.

00:08:15: Why's that?

00:08:16: She says handing post merger integration-the PMI To your existing chief of staff or your COO Is just a recipe for executive burnout

00:08:25: because they already have day jobs.

00:08:27: Exactly

00:08:28: and it just leads to massive deal value leakage.

00:08:30: They can't do both effectively.

00:08:32: That makes total sense.

00:08:33: And on top of human burn out The tech support is terrible.

00:08:37: Omar F. Gouven noted that out of two hundred four mapped M&A tools, only thirteen are actually built for post merger integration.

00:08:46: Wow!

00:08:46: Only thirteen.

00:08:47: Yeah it's wildly underserved.

00:08:49: But integration isn't just about operations right?

00:08:52: Bradley Lapp brought up another huge hidden danger Inherited liabilities.

00:08:58: Oh the legal stuff.

00:08:59: That can be a nightmare

00:09:00: Total nightmare.

00:09:01: I mean.

00:09:01: imagine if buyer acquires a company in twenty-twenty six And then in twenty-twenty eight, they get sued for something the former management did back in twenty.

00:09:10: Twenty four

00:09:10: Yikes.

00:09:11: if they didn't properly transfer that historical insurance policies like directors and officers coverage or reps of warranties They are literally left holding the bag?

00:09:20: Yeah because diligence is just incredibly complex.

00:09:23: an integration relies so heavily on Like you said stretched human capacity.

00:09:28: exactly

00:09:29: which Is why?

00:09:29: The M&A industry is aggressively turning to its newest infrastructure tool Artificial intelligence.

00:09:35: The buzzword of the decade.

00:09:36: Well, but it's no longer just a buzz word here.

00:09:38: It's becoming essential deal infrastructure.

00:09:41: Todd Albright and Rusty Wiley noted that data site is building tools like blue flame assistant And grata intelligence right into the dataroom

00:09:48: Really?

00:09:49: Right inside the Dataroom.

00:09:50: Yeah to summarize deals identified diligence gaps in literally scanned documents for risk In real time.

00:09:57: That is wild.

00:09:59: This race is an important question though.

00:10:02: Chris von Bogdendi has this new M&A deal analyzer.

00:10:05: It basically reads an entire deal room and hands back a strategic brief

00:10:09: in minutes, In minutes?

00:10:11: They used to take weeks of associate hours

00:10:13: exactly.

00:10:14: So how does that change the competitive advantage?

00:10:17: well Vladimir Shulipov made a great observation about healthcare m&a.

00:10:20: in October.

00:10:21: There were fourteen deals worth over four billion dollars.

00:10:25: Okay

00:10:26: And the key signal he saw was at AI companies aren't just selling software anymore They are literally acquiring the health care workflows themselves.

00:10:34: Oh That's a huge shift.

00:10:38: Yeah, like open AI acquiring orchestra bio specifically for their drug development workflows.

00:10:42: that's fascinating But despite all this incredible tech.

00:10:46: John Marsh argues something really grounding.

00:10:48: what's that?

00:10:49: He says AI will definitely optimize parts of the process but Selling a business remains a deeply human transaction.

00:10:56: It's built on trust

00:10:57: Yeah, and AI can't look a founder in the eye and promise to take care of their employees.

00:11:02: Exactly So what does this all mean?

00:11:04: Well if we tie it altogether for you Conviction is what actually drives the market right now.

00:11:10: Earnings qualities would drive your valuation.

00:11:12: Dedicated resources are what drive successful integration Right And AI Is going to absolutely accelerate All Of The Above.

00:11:21: I want to leave you with one final thought, building on that AI data.

00:11:25: Let's hear it!

00:11:26: We just heard that AI can generate deal briefs in minutes and scan data rooms instantly right?

00:11:31: Yeah What happens...in the near future?

00:11:34: when a buyer's AI agent starts directly negotiating risk allocation terms With a seller's AI Agent inside The Data Room?

00:11:42: Oh wow Just bots fighting over working capital targets.

00:11:45: Exactly Well human advisors just have to step back into purely psychological roles like acting as therapists for the executives while AI handles math.

00:11:55: That is a wild, wild future to think about!

00:11:58: Well if you enjoyed this episode new episodes drop every two weeks.

00:12:02: also check out our other editions on PE value creation PE exit strategies venture capital private equity fundraising and strategy in consulting.

00:12:11: thanks so much for joining us yeah

00:12:16: thank.