Why COVID-19 could lead to boom time for M&As

Experts across legal ser­vices, bank­ing and pri­vate equi­ty report steady demand for merg­ers and acqui­si­tions (M&As) so far in 2020, despite the pan­dem­ic. In fact, some agree this could pave the way for an uptick, whether to grow mar­ket share, cre­ate same-cat­e­go­ry economies of scale and effi­cien­cies or to find a bar­gain that could pay off long term.CF

Rick Smith, man­ag­ing direc­tor of insol­ven­cy and busi­ness res­cue spe­cial­ists Forbes Bur­ton, believes M&As can be a par­tic­u­lar­ly effec­tive route for get­ting through the coro­n­avirus cri­sis. “The advan­tages are obvi­ous. Jobs can be saved, busi­ness can con­tin­ue and it’s a great way for direc­tors to exit if they feel they need to move on,” he says. 

“Those seek­ing out com­pa­nies at the moment will be look­ing for either long-term invest­ments and shells to improve on or, con­verse­ly, a short-term acqui­si­tion they can make with the poten­tial to find and cap­i­talise on assets and dis­pose of the asso­ci­at­ed chaff.

“Restruc­tur­ing post-COVID could actu­al­ly start a bid­ding bat­tle for the most promis­ing busi­ness­es. Assets, trade­marks and patents will all be in a state of flux, so M&As could mean we see busi­ness­es with real poten­tial being either saved or brought to the fore.”

The advan­tages [of M&As] are obvi­ous. Jobs can be saved, busi­ness can con­tin­ue and it’s a great way for direc­tors to exit if they feel they need to move on

How­ev­er, com­plet­ing suc­cess­ful M&As is com­pli­cat­ed and comes with chal­lenges. Chief exec­u­tives and C‑suites are being advised to think about hid­den sol­ven­cy issues and poten­tial lia­bil­i­ties, per­haps masked by cur­rent gov­ern­ment finan­cial help and pol­i­cy designed to encour­age busi­ness­es to trade. But insol­ven­cy law and direc­tors’ duties may sig­nal a dif­fer­ent path.

Due diligence must be done on distressed companies

Vanes­sa Chal­less, senior part­ner at Tiger Law, says: “Pur­chasers need to be aware of the motives of sell­ers of shares, where­by they step into their sell­ers’ shoes, and ensure they are not tak­ing on hid­den debts or dis­putes. Pur­chasers of assets, as opposed to shares, need to ensure the assets don’t have secu­ri­ty attached.

“Sell­ing a busi­ness is often a way of avoid­ing lia­bil­i­ties so due dili­gence and sound advice are prob­a­bly more impor­tant now than ever.”

Panos Desyl­las, asso­ciate pro­fes­sor of strat­e­gy at the School of Man­age­ment, Uni­ver­si­ty of Bath, high­lights anoth­er issue for suit­ors: syn­er­gy.

“By tak­ing over worse-per­form­ing firms, suit­ors can grow faster and strength­en mar­ket share at a low price tag. But the appar­ent and imme­di­ate finan­cial ben­e­fits of such deals may lead to a ‘win­ner’s curse’ by dis­re­gard­ing oper­at­ing syn­er­gies,” he says.

“Acquir­ers need to ensure every takeover is root­ed in their over­ar­ch­ing cor­po­rate objec­tives, that the cul­tures are com­pat­i­ble and the inte­gra­tion of the acquired assets is well aligned with the acqui­si­tion ratio­nale.”

Despite such poten­tial issues, many com­pa­nies doing well from the pan­dem­ic now have healthy bal­ance sheets to sup­port M&A activ­i­ty. Pri­vate equi­ty too is keen and is espe­cial­ly inter­est­ed in busi­ness­es that have cut costs and stream­lined.

Frank Shep­hard, nation­al head of cor­po­rate at glob­al law firm DWF, says: “The abil­i­ty to grow organ­i­cal­ly was damp­ened by the cri­sis, so many com­pa­nies looked instead to acqui­si­tion to con­tin­ue growth. There are there­fore many will­ing buy­ers in the mar­ket with strong bal­ance sheets to fund acqui­si­tions.

“There is more than a tril­lion dol­lars in dry pow­der held by the pri­vate-equi­ty indus­try ready to deploy for the right assets.”

Business restructuring needs an integration plan 

Russ Lid­stone, group chief exec­u­tive of The Cre­ative Engage­ment Group, has recent­ly over­seen suc­cess­ful M&A deals.

“We selec­tive­ly ‘defend’, man­age costs in areas chal­lenged, but invest, ‘attack’ to grow share. M&A is a key part of this approach and we land­ed two busi­ness­es – capa­bil­i­ty devel­op­ment and dig­i­tal learn­ing – dur­ing the first lock­down. These busi­ness­es oper­ate in growth areas key to our strat­e­gy,” he says.

“M&A will become more impor­tant in the com­ing months and I think deal flow will increase. Chal­lenged busi­ness­es will look for secu­ri­ty in con­sol­i­da­tion or front-foot busi­ness­es like ours will look to invest to emerge strong­ly from the cri­sis.”

As co-chief exec­u­tive of Yon­der, a busi­ness con­sul­tan­cy work­ing with lead­ing brands includ­ing Ama­zon, Net­flix and Marks & Spencer, Man­fred Abra­ham has just been through this process too. Yon­der com­plet­ed a £25-mil­lion merg­er of four com­pa­nies dur­ing lock­down ahead of a launch planned in April before COVID-19 struck.

But he warns: “A big con­cern for any busi­ness con­sid­er­ing an M&A is how to ensure exist­ing clients are cared for. The last thing you want is to dis­rupt their expe­ri­ence.

“To ensure this, we kept our pre-exist­ing clients informed of our merg­er plans and began onboard­ing them to Yon­der as ear­ly as pos­si­ble so they could take advan­tage of the new range of improved ser­vices, well in advance of the merg­er being com­plet­ed.”

Look­ing ahead, 2021 appears to be head­ing in the same direc­tion. Phil Adams, chief exec­u­tive of glob­al invest­ment bank GCA Altium, says its own deal pipeline is 60 per cent up on Novem­ber 2019.

“I would expect 2021 to be a strong peri­od for M&A,” he says. “Busi­ness own­ers have had a mas­sive shock to the sys­tem and many will have reflect­ed both on their mor­tal­i­ty and on the fragili­ty of the exter­nal envi­ron­ment. It is like­ly to increase the num­ber con­sid­er­ing sell­ing their busi­ness­es. Com­bined with this is a strong expec­ta­tion that tax rates may come under review.

“Some com­pa­nies had a mate­r­i­al pos­i­tive COVID-19 spike in trad­ing and it will be inter­est­ing to see how they are val­ued in future M&A trans­ac­tions.

“Buy­ers and investors will apply close scruti­ny to whether improved results are due to a per­ma­nent chan­nel shift or spe­cif­ic trends dri­ven by forced behav­iour when con­sumers have been unable to spend freely on hol­i­days and social activ­i­ties.”