A recent study published by Mergermarket indicates that on a global basis, consumer markets M&A has outperformed other industry sectors in the past year and is predicted to continue performing well in the next year. This has implications for many industries, as ‘consumer markets’ is a broad grouping that generally covers most industries that primarily involve the purchase of goods by end-consumers (for example, ranging from food and beverage to luxury goods).
According to the study’s authors, compared to the first quarter of 2014, the volume of global consumer markets M&A activity was down only 3% in the first quarter of 2015, whereas the volume of all global M&A was down by 6%. Moreover, when assessed by deal value, during the first quarter of 2015 consumer markets M&A was up by 47% compared to the first quarter of 2014, whereas total M&A was up only 17% in respect of the same period.
What’s driving this strength in consumer markets M&A?
The performance of consumer markets companies is closely tied to overall economic health, because at a very basic level, when consumers have more available cash they can spend more on consumer products. However, with the global economic downturn of recent years, consumers have had less cash available to spend on consumer products.
As a result of slow organic growth, consumer markets companies have looked for opportunities to increase performance by entering new markets, expanding their presence in existing markets by way of industry consolidation, and reducing costs by, for example, acquiring new distribution platforms and efficient technologies. In many cases, purchasing an undervalued target has been an ideal way for consumer markets companies to achieve these objectives.
Of the dealmakers surveyed for the study, 32% predict that the food and beverage industry will see the greatest M&A activity in the next year, as companies try to consolidate and reduce costs. The next greatest area of predicted activity, accounting for 24% of dealmaker responses, is the luxury goods industry, where demographic changes and earning-potential increases in certain locations are forcing companies to adapt their strategy to changing industry norms.
However, the very explanations for strength in consumer markets M&A are a double-edged sword. The study reports that 28% of dealmakers worry that uncertain global economic conditions may dampen M&A activity in the sector, because beyond a certain point if consumers aren’t spending enough, even the synergies realized from an M&A deal may not be worthwhile. Other primary concerns relate to the inability of being able to strike a good deal, with 24% of dealmakers concerned that target companies may overprice themselves, and a further 20% noting that it may be difficult to find suitable target companies.
As with any type of transaction, it’s important that dealmakers understand (and have advisors who understand) the underlying business of the companies involved and industry circumstances.