In 2024, the M&A market is projected to undergo significant changes – with many anticipating an increase in deals will likely be slower compared to the rapid activity seen in late 2020 and the record-setting year of 2021; meaning businesses will need to adjust their strategies accordingly. By Jan Sedlacek (pictured) , Co-founder and Managing Partner at Stryber

Although credit markets have reopened, borrowing money is more expensive than it was previously. This will lead to lower valuations and require businesses to generate more value to achieve the same returns as before. With ongoing uncertainty in the wider economy and geopolitics, businesses which can assess risks and plan for various situations will feel more confident in making decisions compared to those that wait for clearer signals.

Companies should therefore take the current market environment as a chance to diversify from their core business model to secure sustainable growth. It’s a great opportunity to create new sources of revenue by capitalising on low valuations for acquisitions and the entrepreneurial talent available on the market due to the decrease of financing in the venture capital space.

At Stryber, we recently issued our Diversification Dividend report, which analysed 738 listed companies across Europe to assess how total shareholder return developed over the turbulent COVID years and beyond. It showed that stocks from diversifying companies delivered 53% higher annualised shareholder returns in that time period. However, a staggering 70% of companies fail at doing so, which means Superdry, which recently delisted from the London Stock Exchange due to failing to keep up with trends and adapt to changing markets, is in good company, unfortunately.

There is a well-established theory from the world of finance, which has been empirically proven many times over, called Modern Portfolio Theory. It formalises the concept of ‘don’t put all your eggs in one basket’ – which translates to, when we are looking to invest money, we shouldn’t plunge all our wealth and life savings into one stock.

We can apply the same hypothesis here for companies – ensuring you hold different businesses with various sources of value and income streams, will drive success in differing market environments. While your primary revenue driver should be a strong platform to build from and provide funds to create new revenue streams, it usually will not sustain itself indefinitely.

Top performing companies are those seeking opportunities and securing new revenue streams through Mergers & Acquisitions or building new business models, which reward them with a higher total shareholder return. It clearly shows that diversification is not only a strategy for growth but also a hedge against market volatility. Those businesses are better positioned to weather economic uncertainty and deliver long-term success.

The pandemic further accelerated significant change in how businesses operate – whether through the use of emerging technologies or adopting new hybrid and remote working practices. Looking at the total shareholder revenue of businesses during this time, there is a clear outcome separating the ‘winners’ from the ‘losers’.

As an example, the most prominent collapse of businesses we saw during the pandemic was within the travel and tourism sector. As lockdowns tightened, air traffic plummeted by nearly 40%, resulting in the collapse of 64 airlines. Predictably, this downturn created a profitability vacuum, dragging auxiliary services like car rental giant Hertz into bankruptcy as well. Businesses which were overly reliant on in-person revenue streams similarly toppled like dominos. WeWork became obsolete with the surge of remote work, and in a similar vein, traditional fitness centres like Golds Gym lagged behind as home fitness equipment such as Peloton bikes gained popularity. 

This created an urgency for businesses to adapt, in order to weather the economic storm of the pandemic. The question was whether they will be able to. Our research showed that adaptability comes down to the capability to diversify. If your planes are grounded, the best way to adapt to the situation is to have businesses that are not grounded. A great example of a business diversifying in order to buffer against the torrent of economic uncertainty during the pandemic, can be found with Swedish companies, Husqvarna and Indutrade. 

Husqvarna, established in 1689, shifted from making guns to producing outdoor power products, with divisions in gardening, watering systems, and construction. When the pandemic hit, its construction division suffered, but the other two divisions saw increased sales due to people spending more time gardening during lockdown. The CEO Pavel Hajman credits the businesses success to constant reinvention and seizing market opportunities.

Indutrade, on the other hand, weathered the market shock by being a conglomerate built through acquisitions – achieving a 4% growth in sales and a 12% higher EBITDA margin compared to 2019. The company’s CEO, Bo Annvik, highlighted its strategy of diversification, with the business having over 200 companies in various sectors and geographic markets, which reduced the company’s reliance on any single segment or market.

However, the presence of both successful and unsuccessful instances underscores the importance of diversification. Occasionally, misguided efforts towards diversification can result in stagnation of growth and significant underperformance in total shareholder return. This emphasises the need for strategic expertise, appropriate governance, and adept planning, to steer revenue diversification effectively.

A lack of diversification altogether poses a significant risk to shareholder value. It is crucial for ensuring sustained success, particularly when businesses find themselves in uncertain circumstances. While some fledgling companies may struggle due to their age, established firms face a distinct challenge: a lack of organisational ability to execute diversification strategies effectively. Overcoming this obstacle is imperative for businesses, as it prevents their ability to reap the benefits diversification can provide.