Dollars in Dealmaking Decline
Dollars in Dealmaking Decline
By Jake Rickman |
What do you need to know this week?
M&A deals — where companies buy other companies — are at a two-year low. The value of executed deals since 1 January 2022 is 23% lower than in the same period last year, down to $1tn in value.
There are several interrelated factors that, taken together, explain the slowdown in dealmaking, including:
- record-high inflation rates around the world;
- geopolitical instability arising from Russia’s invasion of Ukraine;
- supply chain issues;
- central banking interest rate hikes; and
- financial regulatory reform.
Why is this important for your interviews?
As we have discussed before, one way you can demonstrate your commercial awareness is by identifying certain trends, and then analysing what their effect will be on certain figures and institutions in the economy. You can think of this as the “cause-and-effect model”. A good example is last week’s article on how China’s renewed lockdown measures and Russian-Ukrainian peace negotiations caused a dip in oil prices.
The cause-and-effect model is helpful because it is a simple yet effective way to evaluate complex commercial issues. You can do it every time you read a piece of commercial news.
But another way to approach commercial awareness is to look at a particular phenomenon — lower M&A dealmaking activity — and then work backwards by considering what factors may determine the phenomenon.
This is particularly useful in the context of an interview question designed for you to display your commercial awareness, e.g., “Tell us about a relevant news story.”
By starting with an effect (fewer executed deals), you can then list a series of potential “causes” (inflation, war, supply chain hiccups, interest rate hikes, and new regulations) and then conclude how this is affecting deals (financial activity tends to slow during periods of uncertainty).
By evaluating several different causes, this shows your interviewer two things:
1. You are broadly aware of what is happening; and
2. You recognise that commercial events are complex, while also structuring your answer in a logically concise manner.
Don’t forget to explain how these causes influence the effect. You can approach this in several ways: the important thing is that your interviewers can follow your line of thinking.
How is this topic relevant to law firms?
The final step is always to conclude a step further and consider what this means for a law firm as a business.
Many of the top 50 law firms in the UK derive a substantial amount of their total fees billed from transactional work, much of which arises from M&A activity.
M&A work involves numerous practice areas, including corporate, finance, competition, tax, restructuring, employment, and intellectual property.
Law firms will need to ensure they are not too reliant on M&A activity, otherwise, if the downturn proves to be sustained, their revenue generation will suffer. This may mean downsizing practice areas and reorganising the firm.
Image Credit: Fabio Nodari / Shutterstock.com
