French M&A, so far, so good

While large caps have seen better days, small caps are resisting the prevailing economic climate. It's a kind of unchanging ritual. With July just around the corner, M&A specialists - investment bankers, auditing firms, auditors, consulting firms and other law firms - are busy completing the deals they have been working on for some time before enjoying a summer break. And, at the same time, everyone is watching for the release of indicators to try to scrutinize the market's appetite, beyond its own observation post. In this respect, the year 2022 will be no exception to the rule, especially as it was becoming urgent - even more so than usual - to know the trend in view of the growing threats to the economy.

"After the particularly dynamic year of 2021, driven by the renewed vigor following the covid-related shutdown, the first half of 2022 suffered from a global contraction of 17% in volume and 22% in value”.

The Result: the downturn in M&A activity has become a reality. Without much surprise, it must be said. After the particularly dynamic year of 2021, driven by the renewed vigor following the covid-related shutdown, the first half of 2022 suffered from a global contraction
of 17% in volume and 22% in value, according to the Global M&A Industry Trends 2022; published by the audit and consulting firm PwC. But make no mistake: the 26,000 deals announced in the first six months of the year, totaling to some $2 trillion, are quite comparable to what was seen before the pandemic, when the market was at record levels. So all is well in the best of all possible worlds? Before validating such a conclusion, we need to make a more nuanced analysis. 

The first clue to take into account in order to not be misled: behind the global figures, there are regional disparities that can make observers less inclined to be optimistic. Europe being particularly exposed to the rising cost of energy commodities could prove to be in worse shape than other geographic areas. As for France, it would have suffered a serious setback in the first half of 2022: a 42% contraction, according to calculations by Refinitiv... which notes, however, that France remains above the levels it was able to record in 2019.

"The large cap segment, covering companies valued at more than one billion euros and weighing heavily in the statistics, has seen better days".

In the end, even if the signals seem somewhat contradictory at first glance, the salient facts are indisputable. Thus, the large cap segment, covering companies valued at more than one billion euros and weighing heavily in the statistics, has seen better days. Everyone can attest
to this: for these mega-deals, a wait-and-see attitude prevails more and more because of the difficulty experienced by buyers in finding the necessary bank financing to complete such transactions. As an exception to this general rule, some large-scale spin-offs have emerged:
to name but a few, Veolia intends to finalize the sale of Equans to Bouygues after the agreement they reached in November 2021, while SNCF has divested Ermewa before the summer. But the truth is, there doesn't seem to be a time for big moves in this category...

At the other end of the spectrum, the small cap seems to be spared from the ravages of the economic climate. As usual, in such turbulent times, it is still possible to find debt raised from the banking networks to finance buyouts... provided that companies still have an attractive profile, a condition that also applies to medium-sized companies. "It's still a little early to tell whether this middle segment will slow down in turn" we sometimes hear, as everyone tries to anticipate the consequences of the armed conflict in Ukraine and the ongoing tensions around Taiwan. Translation: for the moment, negotiations are still on the table, with everyone on the lookout for good deals on the market. However, this implies more complex negotiations. The duration of audits is getting longer in the mid-cap sector" notes Géraud Saint Guilhem, a partner in the law firm Veil Jourde.

In parallel, negotiations include asset-liability guarantees and earn-out clauses, which were no longer really in order. These
are the first symptoms of a slowdown in M&A or of a reversal of the balance of power favorable to buyers, which also echoes the fact that acquisition multiples remain high"

"The duration of audits is getting longer in the mid-cap sector. In parallel, negotiations include asset-liability guarantees and earn-out clauses, which were no longer really in order" Géraud Saint Guilhem, Veil Jourde.

Because this is now where the nerve center of M&A is: valuations. Companies that have shown resilience in recent months act as a kind of " valuation for which many acquirers may be willing to pay a high price - with private equity funds counting for a large part of this category. For other entities looking for a buyer, on the other hand, the cut-off point can quickly lead to a postponement of the negotiations in time, because of the high probability that the new owner will be able to get their hands on a potentially failing business model...

And the more time goes by, the more the gap widens between these two categories. “Companies that have shown resilience in recent months act as a kind of "valuation for which many acquirers may be willing to pay a high price”

As a consequence, and in a purely mathematical logic, the Argos Index - calculated solely on completed transactions - stood at 10 times Ebitda in the second quarter, down slightly but still at a high point. "The market is tightening, but without impacting companies with great
qualities " summarizes Morgann Lesné, a partner at Cambon Partners, active in smid-cap. But we can see that valuation expectations are falling on some assets, creating additional entry points for buyers”...