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Leaders and Laggards

We are entering the fourth quarter of what everyone hopes will be a continuing recovery from the Covid era. Challenges remain as inflation persists, currencies weaken, and a recession looms along with the range of geopolitical and natural catastrophes. For cyclical industries especially, a recession will require resolve to continue making smart investments for future growth while attending to the necessary belt-tightening.

For dealmakers, the current environment is more than the usual level of business and financial uncertainty. Decision-making in an environment characterized by uncertainty is inherently risky. Of course, buyers do not want to make acquisitions at premiums to the market nor do sellers want to sell at a discount.

Understand risk factors

Making sound decisions about whether (or not) to proceed with the transaction requires a good understanding of risk factors, their range of possible outcomes, and the probabilities or likelihood to be assigned to each outcome. Several decades ago, decision-making under uncertainty became a staple of managerial economics courses in graduate schools. For several years, I taught a graduate course in this realm of management science.

The important thing to remember is that even in a downturn buyers can find opportunities for profitable growth through business combinations. This requires strong commitment to a strategy that includes inorganic growth investments and paying attention to what is happening in product market segments aligned with that strategy. Stated another way, strategic investors are those that have the wisdom to recognize an opportunity and the virtue to pursue it.

For sellers, reports of declining pricing multiples due to the recession and other factors can dampen enthusiasm for an exit. Especially for private owners who may have spent a lifetime, or even generations, building a sound company, the thought of exiting at a low price is unacceptable. Better to wait than sell the company for less than it’s worth.

Nonetheless, a company with a strong competitive position, consistent record of performance irrespective of the business cycle, and strong growth prospects may be even more valuable to investors in a downturn. Financial sponsors have huge amounts of cash to spend on good deals and good companies. Strategic buyers (trade buyers) have advantages to promote proprietary transactions with good companies when their weaker competitors are concerned with cost-cutting and decision-making inertia that are commonplace during a downturn.

So regardless of whether company is a buyer or seller, as far as dealmaking is concerned, hard times truly separate the leaders from the laggards.

By Jeff Schmidt, CDI Global Executive Managing Director and Chief Executive Officer

About CDI

CDI Global’s international reach provides distinctive advantages for multi-national clients. CDI Global has successfully partnered and collaborated with clients around the world, in vertical sectors that span virtually every major industry.  Our executive team works collaboratively to meet your strategic goals and our success is built on the long-term relationships we develop, providing broader insight and opportunities for our clients. We are committed to conducting all of our business activity with confidentiality, respect and integrity.

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