Despite the effects of COVID-19, the merger and acquisition market has shown stable growth in recent years. The economy in the Netherlands is also still strong. Will this change with the recent developments in the energy market?
Rise in Dutch takeover market in early 2022
The Dutch economy still shows a positive picture in 2022 and continues to grow steadily in 2022 now that all measures and restrictions are completely gone1. Not only is the Dutch economy growing, but also the merger and acquisition market is doing well. In the first half of 2022, the number of transactions increased compared to 2021. Moreover, all the turmoil worldwide has not yet had an effect on valuations. These have remained the same as in 2021, according to figures from Brookz2.
What is striking, however, is that in the EBITDA valuations of the Netherlands compared to abroad are quite a bit lower. For example, pharmaceutical companies in Ireland and England are worth 8.4 times the EBITDA multiple. While in the Netherlands they were sold for an average of 6.35 times the EBITDA multiple. In retail, the same difference occurs compared to France. Whereas French retail companies sold for 5.1 times the EBITDA multiple, in the Netherlands an average of 3 times the EBITDA multiple was paid2. One explanation could be that the transactions in the Netherlands are smaller, so often the multiple will also be somewhat lower.
Rising inflation, rising costs
In August 2022, inflation will have risen further to 12.0%, the last time this occurred in the Netherlands was in 19755. Companies will have to take into account to pass on this inflation in products, in order not to compromise on business results due to the increase in costs. In short, costs will rise in the coming period which will further fuel inflation.
The effect of high inflation makes doing a business valuation a careful exercise. To properly incorporate all aspects, a good analysis of how inflation affects expected returns and costs is needed. But perhaps just as important, what cost increases can or cannot be passed on in price and thus in sales. Forecasting a company’s financial future has become even more uncertain in these times.
Increased employment
Holland’s employment figures also continue to rise. With this, Holland’s unemployment rates have been falling for seven quarters in a row6. This offers a lot of demand from, for example, staffing companies and employment agencies. Consequently, this sector has shown strong growth on average last period7. This growth provides a real driver for mergers and acquisitions in this sector. We therefore see increasing transaction turnover in this market segment.
Favorable dollar exchange rate effects play into the hands of U.S. buyers
Recent research shows increasing interest from U.S. parties in making acquisitions in Europe. Indeed, a favorable dollar exchange rate means that European companies are priced favorably8. This could explain the rise in international transactions in the Brookz report, in which 20% of completed SME transactions involved international buyers.
Whether this effect continues is difficult to estimate. Meanwhile, US interest rates are already a lot higher so the cost of financing has also increased. The higher interest rate in the US will also have an effect on the valuation of companies, as mentioned above. This will depend on the financing mix but also on the currency chosen for the purchase.
So are there no bad news for the merger and acquisition market?
Yes indeed, because we are seeing more and more signs that the market is tilting. Internationally, a turnaround in the number of transactions can already be observed9. In the Dutch market, the picture is still mixed. In certain sectors there is clearly a real decline. Not only are there fewer transactions, but entire industries have shut down work, temporarily or otherwise. Rising energy prices is the big culprit. If quitting is not an option due to the organization or nature of the business, the company will pass the higher costs back into prices. Regardless, this cascading effect has an effect on the companies’ returns and thus the valuations of these companies. All these aspects do not seem to be good drivers for the Dutch M&A market.
Private Equity suffers from higher interest costs
There is also a negative effect of higher interest costs in financing M&A transactions. This higher interest rate on financing the transactions affects their decision especially for Private Equity. They will suffer from higher interest rates possibly financing more with equity or want to pay less for the transaction. In addition, when interest rates are higher, less money flows into Private Equity because institutional investors have more alternative investment options with sufficient returns.
Where are the opportunities? Are there bargains in the market?
A more reserved attitude of Private Equity in the M&A market certainly offers more opportunities for family businesses that finance transactions more conservatively. Especially family capital with ”a longer breath” will be able to benefit from these market developments. They can look out for bargains in the market.
Sources:
- (https://www.cbs.nl/nl-nl/nieuws/2022/33/economie-groeit-in-2e-kwartaal-2022-met-2-6-procent)
- Brookz acquisition barometer H1 2022
- https://www.ecb.europa.eu/stats/html/index.nl.html
- https://www.rtlnieuws.nl/nieuws/nederland/artikel/5318821/zon-zonuren-voorjaar-weerrecord-eerste-half-jaar
- https://www.cbs.nl/nl-nl/nieuws/2022/36/inflatie-stijgt-naar-12-0-procent-in-augustus
- https://www.cbs.nl/nl-nl/visualisaties/dashboard-arbeidsmarkt/werklozen
- https://www.flexmarkt.nl/brancheinformatie/omzet-detacheerders-groeit-met-20-in-tweede-kwartaal/?vmn_sso_identifier=notfound
- https://fd.nl/financiele-markten/1451617/sterke-dollar-geeft-bedrijven-uit-vs-munitie-voor-overnames-in-europa
- https://www.pwc.com/gx/en/services/deals/trends.html