As the M&A Market Heats Up, Here’s What Investors Should Consider

Mike Whitmire, CEO and co-founder of FloQast, CPA

The global economy has seen its fair share of ups and downs in the past few years. Today, despite the upticks in inflation rates and geopolitical tensions leading to global economic uncertainty, Americans are increasingly optimistic about their economic situation. Even the mergers and acquisitions (M&A) market – which dropped 16% in 2023 – is expected to see a steady increase in activity as the year progresses.

As the M&A market heats up, investors must think more critically about their role in the company. Because investors may not be able to impact the decision-making process, they must watch out as any given deal can lead to a windfall or a loss.

There are three things that investors should consider as the M&A market improves:

What are the goals of the M&A, and do they still fit your goals?

The most important thing to evaluate when one of your investments is undergoing a merger or acquisition are the goals and whether or not you believe they align with company interests. Companies pursue M&As for various reasons — two competing companies may be coming together to scale their offerings, or one company may be looking to branch out and target a new industry. If the reasons behind the M&A don’t seem solid or viable to you, that may be the indicator that this company is no longer a fit for your portfolio. Similarly, if the result of the M&A is outside your area of interest or your impact on the company will be lessened, that is also a factor to consider.

How might the valuation and share prices shift?

An M&A deal can have a massive material impact on a company’s value. If this particular company is a long-term investment, it’s critical to consider how the valuation of the company or share prices might change. If an acquiring company pays more than the market value for a target company, it may lower the valuation. On the flip side, if the deal goes well and the M&A leads to increased market share and operational efficiency, it could increase the company’s valuation. Similarly, if a deal is viewed favorably, it could cause stock prices to rise. However, if stock prices remain steady or drop, it could be a sign of doubt in the market.

While it can’t always be predicted, carefully considering how a company’s financial fundamentals might change is critical for investors.

Are there any regulatory hurdles?

Regulatory approvals are often required for M&A transactions, especially in volatile industries or sectors with niche regulations. For example, healthcare companies must comply with regulations related to patient privacy and the FDA, and energy companies may face regulations related to environmental compliance and resource extraction. Additionally, publicly traded companies are subject to stringent disclosure and reporting requirements, which could impact an M&A.

Monitoring the regulatory considerations is a crucial aspect for investors, as non-compliance can impact the feasibility and success of a transaction and potentially result in a loss. Even further, if companies need to become compliant on the heels of an M&A, it can be a costly and time-consuming endeavor depending on the industries involved, the regulatory environment, the size and complexity of the deal, and specific compliance requirements.

Staying Sharp in a Dynamic M&A Landscape

Despite fluctuating sentiments around the U.S. economy, the M&A market looks strong in the year ahead. While M&As can present a powerful opportunity for investors to see a greater return, they can also lead to higher costs for companies that are operating or structured inefficiently, as well as massive losses if the deal doesn't go through. As a result, investors must carefully evaluate their involvement and next steps.

By keeping three key considerations in mind – goal alignment, valuation and share price shifts, and potential regulatory hurdles – investors can stay vigilant and make more informed decisions in a dynamic M&A landscape.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.