Rising Inflation, Economic Turmoil and Ways to Combat Their Potential Impact on M&A

By Rusty Wiley, CEO of Datasite

As inflation continues to soar, ensuring more rate hikes by the Fed and increased capital borrowing costs in the very near future, most businesses are preparing for a downturn. In fact, when surveyed, 91% of 400 leaders of large U.S. companies predicted a recession was coming in the next 12 months.

Many organizations are cutting expenses and scores of businesses in technology, financial services, travel and retail, have already announced plans to restructure their operations in an attempt to reassess, and ultimately pivot towards a healthier balance sheet. This strategy is among the top three deal types M&A dealmakers expect to execute over the next 12 months. This also matches the uptick in restructurings and bankruptcies we’ve seen on our Datasite platform, which facilitates about 13,000 deals a year and gives a look into what can be expected on a global scale. More are likely to follow and, depending on what their plans call for, we may see companies beginning the process before the start of next year, especially if it involves a split-off or stock buyback.

At the start of 2023 and as part of the Inflation Reduction Act, a new 15% tax on split-offs will go into effect. In the past, split-offs and the closely related spin-off transaction, had both been treated as tax-free corporate reorganizations. The new 15% tax on split-offs, from which private equity firms are exempt, is intended to ensure that large, profitable companies with at least $1 billion of profits don’t avoid paying federal taxes.

Given this backdrop, organizations planning to complete these kinds of transactions, or a restructuring, should prepare now. Restructuring plans are most effective when they are developed with ample lead time, helping establish organizational nimbleness. Many organizations will engage their legal advisors for counsel early, which is encouraging as this can generate more creativity in developing the reinvigoration plan. Yet, no matter which restructuring strategy is selected, there are some common challenges businesses should expect to address.

Prepare for the Worst

Proactively model a recession business case in advance. Move production to a variable cost model where possible and see if recurring revenue streams can be built in to keep shareholders and potential investors satisfied with strategic planning. This can help decision makers see the potential outcome of any major restructuring, or other change.

Rally the Experts

Restructuring can differ significantly from other transactions and are fraught with peril for organizations experiencing financial distress at high speed. In most scenarios, organizations will want to use advisory firms with specialized expertise. It’s a small, highly specialized world, where established relationships and credibility are important. Savvy advisors will provide thoughtful advice on a variety of questions, including whether there are non-core assets that can be shed or other financial vehicles that can alleviate debt. Of course, they're only as good as you allow them to be, so even talking through options can provide peace of mind.

Lean into Technology

Restructurings are complicated and document intensive. Taking control and structuring all the required information and data can lead to better outcomes.

Companies restructuring need to think carefully about how they share information and what productivity tools they use to review that information. Here, technology can help. For example, any tools that help with the speed and efficiency in engaging buyers or preventing information leaks, will be crucial. AI and machine learning are also automating many repetitive and manual tasks. As a result, organizations and advisors can manage the ever-growing list of stakeholders and data more efficiently than ever before. 

Expect More Restructurings

Private equity firms still have an excess of ‘dry powder’ and are expected to capitalize on the most attractive opportunities. This is true for the Americas and overseas, especially with the dollar’s strength. As a result, distressed M&A activity in the months ahead is sure to pick up.

With headwinds expected to continue for the foreseeable future, restructuring conversations need to begin now. Those that do can look forward to more streamlined collaboration, increased productivity and, hopefully, faster turnarounds in business performance.

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

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