High interest rates, a world rife with geopolitical turmoil, and an economy teetering on the brink of a recession—2024 seems far from favorable for the M&A market. Yet a full-blown slump has yet to materialize. How is that possible? We discussed this with Hein Stoops, a partner at Hogenhouck M&A.
“A bit of a strange year”—that’s how Hein Stoops sums up 2024 in five words. After all, quite a few developments converged for dealmakers. But what he’s really getting at is that the damage caused by this near-perfect storm within the M&A landscape isn’t actually as bad as it could have been.
“The world is in quite a state of turmoil,” Stoops begins. “The war in Ukraine just drags on, and this year the Middle East was added to the mix. All these geopolitical developments naturally have an impact on the economy. Inflation skyrocketed, and interest rates followed suit. And at the end of last year, we were also in the midst of a recession here in the Netherlands.”
All of this inevitably adds up to a more challenging capital market. “It’s simply more expensive and harder to borrow. And in an uncertain market, buyers are naturally a bit more cautious. Still, a number of M&A segments continued to perform quite well. That may have come as a pleasant surprise to outsiders,” says Stoops, who has been in the business for about two decades.
Plenty to do
AtHogenhouck M&A, where he has been a partner since 2018, they certainly had their hands full this year. “We still have a lot of transactions in the works.”
Stoops acknowledges that Hogenhouck M&A also benefits from its positioning. “We’re very active in sectors that continue to perform relatively well: think IT, tech, software, the energy transition—those kinds of innovative sectors that contribute to a more efficient world will always remain in demand.”
“It all comes down to people spending money.”
A second advantage for the The Hague-based M&A firm is that it focuses on entrepreneurs in the mid-market segment. “In that segment, you’re less dependent on the capital market. Buyers finance a larger portion of the deals with their own equity, so they’re relatively less affected by high interest rates.”
In the higher-value deal segment, the decline was somewhat greater. “For large acquisitions—think 100 million or more—you have to borrow relatively more. And interest rates have tripled. Then it’s just a matter of plugging the numbers into Excel to realize that some deals simply don’t make sense anymore.”
The foundation of the economy
In this way, Hogenhouck M&A has had “a bit of luck” with its focus. But that still doesn’t explain why the downturn in the M&A market hasn’t been as bad as expected. According to Stoops, the explanation—perhaps surprisingly—lies partly in the aging population.
“Actually, the economy has been in turbulent waters for years—ever since the pandemic,” he explains. “Yet a truly deep economic crisis like the one in 2008 has not materialized. A key reason for this lies in an atypical feature of the current situation: while economic downturns traditionally go hand in hand with high unemployment, job figures remain strong.”
And that has everything to do with the aging population. “That trend isn’t affected by the economy. A great many people are leaving the labor market. That means that almost the entire workforce has a job and can continue to consume. And that really brings us to the basic laws of economics: the economy is ultimately driven by demand—everything can be traced back to people spending money.”
Mature M&A Market
This is how an aging population helps keep the broader economy afloat—and, by extension, indirectly supports the M&A market. But it also contributes directly to deal activity—in two ways, in fact.
The first one is again related to the tight labor market. “Acquisitions are a good way to still bring in talent in this tight labor market,” Stoops explains. “So you see that it acts as a catalyst for deals, especially in the IT market, where the shortage of professionals is particularly acute.”
“Given the short investment horizon of many funds, things could get exciting.”
Second, the aging population means that many business owners are approaching retirement and selling their businesses. “This is a trend that has been underway for several years and will continue to provide a steady undercurrent in the coming years.”
According to Stoops, the Netherlands also benefits from a highly mature M&A market. “Conducting a transaction has become commonplace here—more so than abroad. It wasn’t really on the agenda in the past, but the market has now become so professional and transparent that entrepreneurs discuss it and plan ahead.”
Pressure in the boiler
Of course, not everything can be attributed to the aging population. Another factor at play is the rise of private equity. “Four years ago, strategic buyers accounted for more than half of the transactions. That has since changed,” Stoops notes.
While strategic buyers become less active during tougher economic times, private equity firms can’t really afford to do the same. “They’re sitting on a massive pile of ‘dry powder,’ as it’s so nicely called. And that money has to go somewhere. They have to keep making deals—if you don’t generate a return, you’ll simply go out of business.”
Of course, there is a risk involved here: when under pressure, investors are more likely to make a bad purchase. “Especially given the short investment horizon of many funds, this could get dicey. During the boom years between 2020 and 2022, they bought a lot at high multiples. Those holdings will have to be sold again in two or three years. If the market doesn’t pick up, it remains to be seen whether they’ll be able to generate a return on those investments.”
2025
That brings us straight to another key question: Will the market pick up in the near future? Stoops is “cautiously optimistic” about the outlook for 2025.
“At Hogenhouck, I’ve noticed that we’ve already seen a steady increase in activity over the course of this year,” he explains. “And because we’re primarily active on the sell side, we’re right at the forefront. So when more entrepreneurs start talking to us, you know that nine to twelve months later, transactions will really pick up again. So I expect that trend to continue through 2025.”
“The decline in interest rates is alleviating some of the uncertainty in the capital market.”
Things also seem to be slowly moving in the right direction in the higher-value deal segment. “I actually started seeing the first signs this summer that the market for larger dealsis picking up again.”
This cautious shift is largely due to interest rates, which are now falling again. “That makes it easier once again to finance large deals. Moreover, it reduces some of the uncertainty in the capital market. Buyers have a pretty good idea of what to expect: interest rates will remain the same or fall even further.”
However, there is certainly no cause for celebration yet. “The market is too uncertain for that. Especially with all this geopolitical turmoil. If the situation suddenly escalates even further, everything could change in an instant.”
Work harder
As for the outlook for Hogenhouck M&A itself, Stoops expresses a bit more confidence. “We’ve simply built up a very strong reputationover the past seventeen years. You can also see that we’ve consistently ranked high on the lists of the most active dealmakers lately.”
“That’s not really our main focus,” he clarifies, “but of course it does help: entrepreneurs are, after all, looking for experts with the necessary experience to guide them through such a decisive step in their lives.”
And such a strong track record is especially valuable in times when things don’t always go smoothly. “That certainly contributes to the fact that we still have a lot of projects in the works. And, of course, it also helps during those processes.”
“Because no matter how you look at it, there’s a bit less interest from buyers, and they’re more critical. That means we have to work a little harder sometimes, but that just makes it more fun—and, fortunately, it means our added value is being recognized more again!”
(This article was written by Consultancy.nl)
