Economic Gloom Puts M&A Market Back Into Value Mode

When overvalued companies deflate in a wave, as we’re seeing now, that’s either heralding bad times ahead or an oncoming era of growth, depending on whether you’re buyer or seller.

The record number of initial public offerings (IPOs) and the burst of special purpose acquisition company (SPAC) deals in 2020 and 2021 is culminating poorly for some high-flying stocks of the pandemic era, covering the field with acquisition targets in the process as consolidation looms.

Saying there’s now a “night and day” difference compared to 2021, Pratik Gandhi, co-founder and chief operating officer at global money movement platform Nium, told PYMNTS that “if last year was all about high valuations and dealmaking, this year is all about being watchful and careful.”

That’s partly an acknowledgement of a review underway since January by the U.S. Justice Department’s Antitrust Division and the Federal Trade Commission (FTC) into these deals.

In January, the FTC said evidence shows that many industries are becoming less competitive, potentially “imperiling choice and economic gains for consumers, workers, entrepreneurs, and small businesses,” and this is likely to persist or get worse thanks to a surge in mergers this year.

“The whole way this unraveled was a much faster process than what we had anticipated,” Gandhi said. “There were still some conversations about deals happening in January and February, but the changed sentiment just happened too fast. I think there are still conversations going on, but we are at the stage where the sellers want a higher valuation based on whatever they had received offers for in the past, and the buyers are expecting that the valuations will go down.”

Gandhi sees the familiar signs of overvalued companies coming back down to earth, recognizing this as both an indicator of an underperforming market and as a prime growth opportunity.

“We are already seeing … lots of layoffs happening [and] people running out of funds,” he said. “It could be entirely possible that a company may run out of funding options, for instance, and they’re looking for some white knight.”

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SPACs Taking Flak

By some estimates having peaked in the first quarter of 2021, the surge in companies going public via SPACs — followed by the evaporation of SPACs in a crush of criticism about the dangers of seeking overfast access to capital markets — may end up creating growth anyway.

In general, Gandhi said, M&A tends to be an efficient way to expand because it dramatically cuts the time it takes to enter a new geographic market or line of business. There’s a wrench in the works, however: those bloated valuations.

“There is a big gap between what the sellers and the buyers seem to be wanting at this stage,” he said. “I think there could be a couple of things which could happen, for instance. One that the sellers could become very keen for instance, [and] desperate to get out.”

With prevailing investor winds punishing growth without profit, Gandhi said this is a time to look under the hood of troubled companies for those with a real concept at the center.

“It’s a free economy,” he said. “People are running out of funds. But there is a business which has already been created. Should we let it … just disappear? There are clients. There is a certain amount of revenue. There are employees. There’s a market reputation.

“Should we just let it disappear, or should we take the big step and be bought by somebody else who could give us, for instance, more stability? That’s the kind of consideration that has to go on.”

Read more: Nium Plans $400M European Expansion

That’s making 2022 look like rich pickings for acquisitions, given the sheer number of startups that were launched and even scaled somewhat before venture capitalist (VC) confidence vanished.

He said, “We’ve gone through a stage where there have been inflated valuations because there was a lot of excess money lying around. VCs had a lot of money and there was this thing about [fear of missing out], and their own investors saying, ‘Please invest the money as quickly as possible.’”

But some overvalued companies are inherently valuable, making them fine M&A opportunities.

“Everybody wanted to invest in everything. Now there’s a reverse reaction, which is basically risk aversion. If you look at it from an investor standpoint, it’s the opposite of how things should be,” he said. “If the same company that you’re looking at is now available at a lower price, then you should be jumping at it.”

The New Rules?

There are changes coming to the regulatory landscape as the Justice Department and FTC take public comment on plans to cool off the trend of investing in ballyhoo over balance sheets.

“I think once the regulators step in for anything [there’s] a cooling effect, and the cooling effect could be the interest rates … going up,” Gandhi said.

Pointing to the SPAC bubble and how regulators are clamping down there, he said, “That whole shortcut process has been taken out. Now, essentially, there is no arbitrage left between doing a SPAC and an IPO. The regulators are basically saying … it’s the same thing because the money is still public, you’re still going to be listed, and the risks continue to be the same.”

From the Nium standpoint, a landscape littered with undervalued companies running out of VC cash is where the next big thing could be hiding, needing to be plucked out and developed.

“Our excitement continues to be the fact that we want accretive M&As, for instance, if there is a big arrow in our quiver which is missing,” he said. “In our case it happens to be Latin America, Africa — these kinds of locations is where we are keen to invest in. These are complex geographies.”

Nium is looking for “clean companies,” which Gandhi defines as having all licenses and back-end processes in order and up to code.

“For us, again, the decision-making process is the same. We are still looking at how we can crash the time in which to enter a market,” he said. “The money is available, and this is what we want to spend the money for. Not to expand into a lot of unnecessary areas and stuff like that, but basically how we can buy companies that are going to be good for us in the longer term.”