M&A: Why companies may pursue alternative deal structures

Merger and acquisition activity in the Permian Basin hit a new record of $100 billion in deals during 2023, underscoring the oil-rich region's appeal, according to Wood Mackenzie. Colin Wittmer, US Deals Leader at PwC, joined Yahoo Finance's Rachelle Akuffo to discuss the M&A outlook for 2024.

Wittmer notes that companies often pursue acquisitions to "reinvent their business models," calling it "the fastest way for them do that." However, with mounting regulatory scrutiny, he says leaders are having to get "creative about how they execute transactions."

Watch the video above to hear Wittmer's analysis on how businesses may try to get more creative with their M&A strategies.

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Video Transcript

RACHELLE AKUFFO: Well, M&A in the Permian Basin is breaking records this year. Now, the value of merger and acquisition deals in the oil-rich region in West Texas and southeastern New Mexico hit a total of $100 billion in 2023 alone. That's according to a report out this week by Wood Mackenzie. And this comes after Warren Buffett backed Occidental Petroleum acquiring gas explorer Crown Rock for $12 billion this week.

Now, with rates holding steady and the street betting on cuts by March, how are business leaders addressing mergers and acquisitions in the new year? Well, according to a new report out today by PwC, companies may begin to look at alternative deal structures. For more on this, Colin Wittmer, PwC's US deals leader, is here. Thank you for joining me this morning.

COLIN WITTMER: Thank you for having me.

RACHELLE AKUFFO: So talk about these alternative structures-- of course, talk about these alternative deal structures, especially as we consider the pressure that we're seeing from regulators.

COLIN WITTMER: Right, so we've seen clients get pretty creative in the way that they start to execute on transactions. We've seen transactions where it's up to a 49% interest so that the former private equity client could cash out a bit. You could preserve the capital structure so that you wouldn't have to refinance the debt. And then you can do another transaction later on.

We've also seen precursors to M&A, like strategic alliances, joint ventures, even licensing agreements to put your toe in the water, get a little bit more familiar with your partner, and then have that be a precursor to a larger transaction when the rate environment is more stable and improves.

RACHELLE AKUFFO: And as we're looking at what we're seeing in the Permian Basin, what is it about that region? Is it just an energy story as we look at some of these large mergers and acquisitions versus these smaller ones that are up and coming for 2024?

COLIN WITTMER: Yeah, I think it is largely what you just described for the Permian Basin. But if you think of our other corporate clients, M&A for them is basically business model reinvention. It's the quickest way to do it. Our clients that use transactions to transform their business, whether it be because of climate change, technological disruption, demographic shifts, a fracturing world, social instability, put all that together, businesses need to reinvent their business model. And M&A is the fastest way for them to do that.

RACHELLE AKUFFO: And usually, we've been talking a lot about recession here. And that's usually prime time to start seeing this. Obviously, we're still not there at recession. The Fed might stick the landing. What does that mean for the types of deals that are going to be more popular going into the new year?

COLIN WITTMER: Right, and I think you're right the jury's still out whether or not we'll have the soft landing. But it does seem as though things are trending that way. We are nearing the end of a profit recession. So if you looked at the S&P 500 EPS growth, we had three straight quarters of decline. But that has changed in the second quarter of 2023, and it's expected to continue. So that bodes well for M&A.

Large transactions, I think, will still be challenging to get done, in particular with the antitrust backdrop that we've seen and how aggressive the US government has been around antitrust actions. So very large transactions, I think, may take a little bit of time to come back. But there's lots of tuck-ins that our clients are planning to do right now just to transform their businesses.