Waves in M&A: Examples from the Czech market
Every year in the Czech Republic, approximately 100 companies with a value of over CZK 125 million change ownership. Transaction activity is increasing thanks to the influx of money into the corporate market. Looking at the last 20 years in the M&A market, an interesting and recurring phenomenon can be observed: waves of interest from multiple investors in the same companies in a given sector. This phenomenon, which we can call "herd behavior," is also known in social psychology.
Pioneers and Snowballs
Let's imagine a 3- to 5-year period in which the following happens: someone discovers a gap in the market—they see what others have not yet noticed. Let's call them a "pioneer." This pioneer begins to buy quietly, taking advantage of the low level of interest in the industry at that time. They know that the market will change strategically. Their goal is to buy the company, even at a price higher than the current valuation, if they believe that the value of the company will increase significantly.
Once the pioneer's transaction is successfully completed and announced, the market changes over time. Other investors begin to realize what the pioneer knew two years prior. A snowball effect ensues—the original pioneer transaction attracts other investors seeking to buy companies in the industry. Sellers can choose from several interested parties, which leads to higher and higher valuations due to competition among investors and changes in the market.
Sobering
However, demand is becoming saturated. Investors have bought up or are giving up on acquisitions in the sector due to sellers' high price expectations. The market is at its peak; those who have not sold are continuing to do business in a sector where new owners are now operating. The new owners have high entry prices and usually high expectations for return on investment. They are beginning to take measures to strengthen the profitability of the purchased company. The market, or rather the behavior of companies with new owners, is unpredictable. The original owners/managers coexisted in the market for many years. Now, the situation in the industry is different because the original relationships between the original owners have broken down.
Examples of herd behaviour in practice
- E-shops during covide - companies that sold online were in the spotlight of investors, achieved excellent margins, and the media was full of reports that brick-and-mortar stores would never recover.
- Automation - between 2016 and 2019, there was a wave of interest in the automation sector. Companies were noticeably short of labor, and any company involved in the manufacture of automation machinery was attractive to investors.
- Automation - 2016-2019 saw a surge of interest in the automation sector. There was a noticeable shortage of labour in companies and any company that was in the business of manufacturing machinery for automation was attractive to investors.
- Agriculture - After 2020, there was a wave of interest in agricultural businesses. Prominent entrepreneurs from other industries became owners of agricultural businesses and vast tracts of farmland. This interest peaked in 2022 when agricultural commodity prices rose dramatically.
- Football clubs - from the 2023/2024 season, there was increased interest in owning football clubs. The main motives may be to increase prestige and PR. However, the financial benefits of running a club are highly questionable, especially when the team does not play in the Champions League.
History has shown that acquisitions have brought enormous value to many investors. It has been proven that 1+1 can really become more than 2. These investors relied on their own judgment, supported by calculations from an independent advisor. They looked for synergies, worked under various scenarios for the development of the acquired company, but above all, they were guided by common sense and not by what others were doing. It has often paid off to follow the saying: sell when you don't have to, and buy when it makes sense.