M&A market 'in for more of the same' in 2023, professor says
The Wharton School Professor Emilie Feldman joins Yahoo Finance Live to discuss the expectations for M&A deals and divestments going into 2023, market conditions, inflation, SPAC funding, and the outlook for a recession.
Video Transcript
BRIAN SOZZI: Companies took a cautious approach to M&A this year with good reason. Rising interest rates raised the cost of borrowing to less attractive levels. Potential targets became less sexy as growth rates slowed. And there has been a general black flag hanging over any deal in the form of possible-- of a possible recession. So will 2023 be any different for deals? Emilie Feldman, professor of management at the Wharton School, joins us now. Emilie, good to see you. So how different will next year look, if anything?
EMILIE FELDMAN: Hi, good morning. Yeah, I think it's going to be quite similar, at least for the foreseeable future, right? I think at least through the first half, sort of given the environment, the uncertainty around where interest rates are going, the volatility in the stock market, geopolitical factors, it's sort of hard to see a quick change when the calendar turns. So from that perspective, I think we're in for more of the same, at least for a little while. Obviously, we'll see how things evolve in sort of the second half plus of the year. But that's at least my prediction for the short-term.
BRAD SMITH: What does that mean for SPACs? This is the entire kind of construct for how some companies were able to tap into the public markets. And it was really via the dealmaking that took place-- a shell company that would go public and then the dSPAC and the acquisition of some smaller prospective company that was really kind of targeted as part of the shell company going public.
EMILIE FELDMAN: Yeah, it's an interesting question. And I think there's two factors, right? I think, obviously, the market conditions are affecting this, right, in terms of the attractiveness of this structure, right, of SPACs in general. But then also as we're sort of seeing sort of a tightening environment perhaps for the entities that might be SPAC worthy in the first place, as things get more difficult from that perspective, that could also be a challenge from the input, right?
There was just an article that was saying that this was the greatest unwind of SPACs that we've seen basically in five, 10 years, right? So I think from that perspective, it's a contributor as well to sort of the broader M&A market. But obviously, there's a big difference between sort of SPAC transactions versus sort of large corporate dealmaking that we typically think about.
BRIAN SOZZI: Emilie, this year really, I would say, is the year of, or has been one of divestitures. Kellogg, of course, going through their restructuring process. GE, we're talking about GE healthcare getting ready to be spun off in early January. Will we see more of that next year, especially if we get a recession?
EMILIE FELDMAN: Absolutely, and I really think that this is actually the trend to look out for in the coming months, right? So, yes, we've seen a ton of this activity already. And I would argue that that's not necessarily as much linked to sort of the macro environment and the conditions that we're facing.
But now that things are tightening so much, right, I think we can expect to see this. And there's really two key drivers here, right? So one factor is, of course, the fact that liquidity is going to be much more constrained. And so divestitures can often be used as a source of liquidity for companies, depending on how they're structured. So that's one big factor that should prompt more divestiture activity.
But the other is sort of a broader issue, which is that when conditions tighten, the value of focus within organizations becomes even more significant. So you have a company that has a lot of different business units. What's your core? What's your strategy? Where are you investing your capital? Where are managers and executives spending their time and attention? What's really central to the company's strategy becomes a really critical question.
And so one of the big reasons that divestitures are valuable is that they can help companies to achieve this focus that is especially important in this kind of environment. So for both of those reasons, right, the liquidity and the focus arguments, I would say that we should really be on the lookout for more of these transactions in the coming months here.
BRAD SMITH: Valuable insights from someone who literally wrote the book on divestitures. Emilie Feldman, professor of management over at the Wharton School, thanks so much for taking the time here with us today. And early happy new year to you as well.
EMILIE FELDMAN: Same to you. Thank you so much.
