Embark recently brought together some of the brightest minds in M&A for a couple of roundtable events in Dallas and Salt Lake City. Our panelists shared perspectives and tips, swapped war stories, and put on their prognosticator hats in what turned out to be wildly engaging, informative, and fun—yes, fun—conversations on a complex, often confounding topic.

For everyone who couldn’t attend, we’ve collected the most significant takeaways from the roundtables to ensure your journey through the M&A badlands is successful. Because we’ll do everything we can to see you prosper. Truth.

1. Navigating the Higher-for-Longer Interest Rate Environment

The surge in interest rates has reshaped deal financing and valuations. Companies are increasingly turning to equity-heavy structures to offset high borrowing costs. As discussed in our roundtable, the rapid rise in rates from near-zero levels to current highs is unprecedented. CFOs must now consider the long-term effects of sustained higher rates on their M&A strategies and adjust their capital structures accordingly.

Other Roundtable Insights:

• Reduced Leverage: The high interest rate environment has reduced the leverage available in deals, shifting from historical norms of 4-5x EBITDA to current levels of 2.75-3x EBITDA.
• Adaptable Financial Strategies: It's crucial to develop financial strategies that can adapt to fluctuating interest rates. CFOs should regularly review their capital structure and consider refinancing opportunities to lock in lower rates when possible.
• Alternative Financing: Companies should also explore alternative financing options—issuing equity or seeking strategic partnerships, for example—to maintain flexibility.
• Stress-Test: Additionally, stress-testing financial models under various interest rate scenarios can help make better-informed decisions.

2. Sector Spotlight: Uneven Recovery Underway

The economic recovery has been uneven across different sectors. While consumer and tech M&A activity has been sluggish, there are signs of improvement. High-quality consumer brands can still command significant valuations, with some trading at multiples as high as 17x EBITDA. So, while the market continues to be cautious, there’s definitely good news for strong brands on the valuation front thanks to investor confidence.

Other Roundtable Insights:

• Barbell Effect: There's a barbell effect in consumer deals, with transactions either occurring at very high multiples (17x+ EBITDA) for premium brands or at much lower multiples, with very few deals in between.
• Portfolio Diversification: Diversifying a portfolio within a sector can help mitigate risk. For example, companies could explore sub-sectors that are more resilient to economic downturns, such as essential goods or digital services in the consumer sector.
• Core Strength Focus: Companies should enhance their core strengths and divest non-core assets to streamline operations when appropriate. One of the roundtables discussed an industrial company that successfully boosted its performance by selling off a non-core division and reallocating resources to high-growth areas.

3. Operational Efficiency: The Key to Maximizing Valuations

Showcasing strong margins and operational efficiency remains critical for sellers, significantly boosting valuation multiples in many deals. Focusing on metrics like customer acquisition cost payback, lifetime value, and a mix of fixed and variable costs can drive better financial outcomes. Further, initiatives such as automation, procurement optimization, and zero-based budgeting are effective ways to enhance these metrics.

Other Roundtable Insights:

• Operational Audits: Regularly—or continuously— auditing operational processes to identify inefficiencies can help companies constantly improve. Leveraging data analytics can provide insights into areas for cost reduction and efficiency gains.
• Utilizing Tech: Implementing technology-driven solutions to optimize procurement and streamline operations can lead to significant cost savings. For example, a tech company discussed during one roundtable reduced operating expenses by 10% through streamlined procurement processes and automation, enhancing its attractiveness as an acquisition target.
• Workforce Management: In many cases, focusing on margins and operational efficiency should also involve restructuring the workforce and implementing performance-based incentives to drive productivity.

4. Navigating the Complex Regulatory Landscape

The regulatory environment is becoming more stringent and tangled by the day, with the FTC applying new theories of competitive harm. Even smaller transactions that don't pose significant competitive threats are now subject to extended reviews. Our panelists noted that the FTC's aggressive stance requires buyers and sellers to prepare for longer approval timelines and more detailed information requests.

Other Roundtable Insights:

• Regulatory Changes: Staying informed about regulatory changes and trends can help anticipate potential hurdles. Companies can also benefit from building strong relationships with regulatory bodies to promote better communication and understanding.
• HSR Antitrust Rules: Panelists discussed upcoming changes to Hart-Scott-Rodino (HSR) antitrust rules, which could significantly increase the complexity and cost of regulatory filings.
• Engage Experts Early: Companies should engage regulatory experts early in the deal process to navigate these complexities. Being proactive with regulators and thorough documentation prep can limit delays and create a smoother approval process.

5. Winning the War for Talent During M&A Disruption

Retaining key talent during M&A is crucial. Effective strategies in this area include stay bonuses, equity incentives, and clear post-merger communication plans to reduce turnover. A strong corporate culture and a compelling vision for the future are also essential for retaining employees.

Other Roundtable Insights:

• Employee Engagement: Engaging employees early in the M&A process and involving them in decision-making can increase their buy-in and reduce resistance to change. Regular town hall meetings, leadership development programs, continuous feedback mechanisms, and generally transparent communication can also help address concerns, build trust, and keep everyone motivated during the transition period.
• Comprehensive Retention Plans: Diving in further, developing a comprehensive employee retention strategy that highlights the merger's benefits, career growth opportunities, and financial incentives can significantly reduce turnover and maintain morale during the transition.

6. Flexibility in Deal Structures

Flexibility in structuring deals has become essential in today’s market. Companies that can offer various deal structures—including minority investments and growth equity—have a definite competitive edge. This flexibility lets investors tailor their approaches to the unique needs of target companies, making it easier to close deals even in a challenging environment.

Other Roundtable Insights:

• Earnouts: Earnouts have become more common as a way to bridge valuation gaps between buyers and sellers in uncertain market conditions, where part of the payment is based on the future performance of the acquired company. 
• Expanding Investors and Partners: Panelists also noted that a flexible approach to deal structuring can help attract a wider range of investors and strategic partners.

7. Strategic Divestitures and Focused Growth

Strategic divestitures are becoming more common as companies look to streamline operations and focus on core strengths. Once again, divesting non-core assets can free up resources and capital, which companies can then reinvest into high-growth areas of the business.

Other Roundtable Insights:

• Enhance Market Positioning: Strategic divestitures can also enhance a company’s market positioning by letting it focus on areas where it has a competitive advantage. This approach can lead to better resource allocation and improved overall performance.
• Regular Portfolio Reviews: Further, regular portfolio reviews help identify non-core assets to potentially divest. This ensures a company remains agile and competitive, assuming it reinvests in high-growth areas.

8. Embracing Technology and Innovation

Technology continues to play a crucial role in transforming businesses and driving efficiency. Companies that embrace emerging technologies such as AI, machine learning, and data analytics position themselves to stay competitive and meet their customers' evolving needs.

Other Roundtable Insights:

• Robust Technology Stack: One panelist highlighted the importance of a robust technology stack and integration roadmap as a key factor in assessing the quality of potential acquisition targets.
• Cybersecurity Measures: Companies should also consider the cybersecurity implications of new technologies. Ensuring robust cybersecurity measures can protect sensitive data and maintain customer trust.
• AI Adoption: While AI is a hot topic, many companies are still in the early stages of adoption, particularly in sectors like healthcare, where data privacy concerns are immense.
• Data Analytics and Automation: Investing in technology significantly enhances operational efficiency and provides valuable business intelligence. For instance, one dental company discussed in a roundtable implemented automation in its billing office and was able to reduce staff from 60 to 6 as a result, all while maintaining the same level of output—that’s a 90% increase in efficiency.

9. Preparing for ESG Compliance

Environmental, Social, and Governance (ESG) considerations are becoming increasingly important in the M&A landscape. Companies looking ahead can address ESG factors that enhance their reputation, meet regulatory requirements, and attract socially conscious investors.

Other Roundtable Insights:

• Growing ESG Importance: State-specific regulations are also making ESG compliance more critical. Therefore, companies must have robust frameworks for tracking and reporting ESG metrics. Our roundtable participants highlighted this, noting the increasing pressure from investors and regulators to adopt sustainable practices.
• Operational Efficiencies: ESG initiatives can drive operational efficiencies. Reducing energy consumption, waste, and implementing sustainable practices can lower costs and improve profitability. For instance, a participant shared how their company cut operational costs significantly by integrating energy-efficient systems and waste reduction protocols.
• Dedicated ESG Committees: Establishing a dedicated ESG committee is essential for navigating these intense requirements, working with advisors to develop a comprehensive ESG strategy and, in turn, driving better stakeholder engagement and long-term sustainability.
• Investor Appeal: A panelist highlighted that investors are increasingly looking for businesses that not only generate profits but also contribute positively to society and the environment. This trend is particularly strong among younger investors who prioritize sustainability in their investment decisions.
• Strategic Planning: In general, incorporating ESG considerations into strategic planning can create a competitive edge. Companies should integrate ESG goals into their overall business strategy, ensuring that these goals align with their long-term objectives. By doing so, they can better navigate regulatory changes and market demands.

10. Private Equity’s Evolving Role in M&A

As always, PE firms are playing a significant role in shaping the M&A landscape. However, the current economic environment has created both challenges and opportunities for PE firms. Understanding these dynamics is crucial for companies considering private equity in their M&A strategies.

Other Roundtable Insights:

• Pressure to Deploy Capital: PE firms face pressure to deploy capital, with some having been inactive in deal-making for extended periods. This pressure can lead to competitive deal-making but also potential overvaluation of assets. Panelists noted that this environment requires careful due diligence and strategic planning to avoid overpaying.
• Fundraising Challenges: The fundraising environment for PE firms has become challenging, even for those with strong track records. Despite this, some firms are successfully raising new funds and increasing fund sizes, though it requires more effort than in previous years. The discussion highlighted the importance of solid performance and clear value propositions in attracting new investments.
• Adapting Strategies: PE firms are adapting their strategies, with some major players exiting certain sectors entirely due to poor performance. This shift indicates a more cautious approach to sector selection and investment. 
• Flexible Deal Structures: Flexibility in deal structures has become a key advantage for PE firms. Those able to offer a range of options, from minority stakes to majority ownership, are better positioned in the current market. Our panelists specifically emphasized the importance of adaptable strategies to meet the unique needs of target companies.
• Management Teams: The relationship between PE firms and management teams remains crucial. In fact, selecting the right management team is often seen as more important than the specific deal structure or sector.

A Final Word from Embark

Yes, the M&A market is still facing some hurdles. But when isn’t it? As always, M&A success comes down to understanding your needs, goals, and the environment around you. And that’s exactly what we hope these roundtable insights deliver—boots on the ground, real-time insights to help you make better decisions.

Of course, even the most thorough, in-depth discussions can’t speak to your specific needs and goals. But that’s why the M&A advisors at Embark exist—to provide customized guidance at every step of the M&A process, no matter how complex, unique, or ambitious your plans might be. So, when you’re ready, we’re ready. Let’s talk and see what we can do for your future.