Q&A: M&A continues as deal processes go remote

Are stress-driven restructurings driving M&A activity?

We saw a spike in bank­rupt­cies and restruc­tur­ings in the late sec­ond quar­ter and ear­ly third quar­ter, when lock­downs hit hard against many busi­ness­es. We expect more restruc­tur­ings will come in 2021 as the coro­n­avirus pan­dem­ic con­tin­ues and sup­port pack­ages end. How­ev­er, there was a rel­a­tive­ly quick return to a near-nor­mal lev­el of merg­ers and acqui­si­tions (M&A) after the ini­tial shock of the first lock­downs. Many of the favourable under­ly­ing con­di­tions dri­ving M&A at the start of the year are still present. I am cau­tious­ly opti­mistic about the M&A mar­ket mov­ing for­ward. The most affect­ed sec­tors, includ­ing high street retail, hos­pi­tal­i­ty, ener­gy and min­ing, will see more con­sol­i­da­tion. Tech­nol­o­gy and health­care have been less impact­ed, but com­pa­nies in those sec­tors may be open to inter­est from poten­tial buy­ers because val­u­a­tions are favourable.

How will the U.S. election result and vaccine breakthroughs affect the M&A market?

With news about vac­cines and the U.S. elec­tion sig­nalling a poten­tial eco­nom­ic turn­around, many might see this as the time to start buy­ing. Pri­vate equi­ty firms are sit­ting on a mas­sive war chest of around $2.5 tril­lion, which could serve as a cat­a­lyst for M&A in 2021. Improved investor and con­sumer con­fi­dence could mean few­er restruc­tur­ings than we orig­i­nal­ly antic­i­pat­ed.

What challenges are M&A buyers and sellers facing in the pandemic?

Find­ing the right buy­ers or investors to approach a year ago wasn’t an over­ly dif­fi­cult exer­cise. Now, it’s much more chal­leng­ing because of the uncer­tain­ty per­va­sive in the mar­ket. Deal­mak­ers are unsure which com­pa­nies are active­ly pur­su­ing M&A and whether once-active buy­ers are now focused on pre­serv­ing cash. Pre­vi­ous­ly, a com­pa­ny wish­ing to sell would have a list of, say, ten or twen­ty poten­tial buy­ers to approach. Now, that num­ber is sig­nif­i­cant­ly grow­ing as sell­ers are cast­ing a wider net. With more com­pa­nies in the mix, the com­plex­i­ties of man­ag­ing the mar­ket­ing process increase, as do the con­cerns around infor­ma­tion secu­ri­ty, giv­en the mount­ing reliance on remote com­mu­ni­ca­tions. Also, due-dili­gence process­es are becom­ing more dif­fi­cult due to man­ag­ing a deal team remote­ly. Anoth­er chal­lenge the pan­dem­ic has high­light­ed is an increas­ing sup­ply chain risk. In the glob­al econ­o­my, sup­ply chains can be more ten­u­ous than many pre­vi­ous­ly thought. Mit­i­gat­ing these risks involves sol­id sup­ply chain due dili­gence, ver­i­fy­ing how strong the chain is and iden­ti­fy­ing the weak links and dis­rup­tion points.

How can buyers and sellers overcome these obstacles?

Peo­ple adapt quick­ly, and dif­fer­ent process­es are emerg­ing to con­tin­ue doing deals in a remote envi­ron­ment. Prepa­ra­tion is impor­tant. You need advis­ers with good intel­li­gence on what buy­ers and sell­ers are doing. Sell­ers should make sure they have all their infor­ma­tion togeth­er and ready, so they can hit the ground run­ning. Tech­nol­o­gy tools and bespoke solu­tions help buy­ers and sell­ers over­come these chal­lenges and move quick­ly towards a deal. For exam­ple, vir­tu­al data rooms – online stores of infor­ma­tion – pro­vide insights into buy­er behav­iour and help nar­row your list of buy­ers and smooth the due-dili­gence process­es. There are many effi­cien­cies to gain by run­ning these process­es remote­ly. Vir­tu­al data and oth­er core tech­nolo­gies have been avail­able for a while, but peo­ple need them much more dur­ing COVID-19. Dri­ven by our new remote envi­ron­ment, extra func­tion­al­i­ty is added reg­u­lar­ly to sup­ple­ment those process­es. For exam­ple, our vir­tu­al data room now inte­grates direct­ly with Zoom. While Zoom wasn’t designed specif­i­cal­ly for mak­ing deals, many com­pa­nies are using it dur­ing the due-dili­gence stage instead of in-per­son meet­ings.

Is this the end of the handshake?

Not yet. Peo­ple would still pre­fer to meet in per­son if they can. How­ev­er, it is now pos­si­ble to do a deal with­out ever meet­ing the oppo­site par­ty. I have seen this hap­pen this year many times.

How can companies address the challenges of remote deal-making?

The chal­lenges are man­ag­ing a dis­parate deal team, find­ing dis­persed infor­ma­tion and iden­ti­fy­ing key risks. These chal­lenges can be over­come by using an inte­grat­ed plat­form. An advanced plat­form will use arti­fi­cial intel­li­gence (AI) to auto­mate M&A due dili­gence. The sell­er or invest­ment banker can set up the infor­ma­tion in a data room accord­ing to their check­list. Still, this infor­ma­tion rarely aligns with how a prospec­tive buy­er or investor wants to see their infor­ma­tion. The AI embed­ded in our solu­tion auto­mat­i­cal­ly maps the buyer’s check­list to syn­chro­nise with the seller’s data. The result com­ple­ments and accel­er­ates exist­ing work­flows.

What barriers do they face in closing a deal and in post-merger integration?

After due dili­gence, one of the biggest chal­lenges is when reg­u­la­to­ry approvals are required. This is more chal­leng­ing than ever due to the high scruti­ny of cer­tain trans­ac­tions, par­tic­u­lar­ly cross-bor­der deals. Anoth­er dif­fi­cult part of any trans­ac­tion is post-merg­er inte­gra­tion when all the mod­els and fore­cast­ing become real. Many buy­ers keep the vir­tu­al data room open to address these issues and use the plat­form as an infor­ma­tion and col­lab­o­ra­tion con­duit. Our clients reg­u­lar­ly use our plat­form to help with reg­u­la­to­ry reviews and post-merg­er inte­gra­tion.

Do you have any other tips for buyers and sellers?

Buy­ers and investors need to under­stand whether the dri­vers mak­ing com­pa­nies dis­tressed are short- or long-term in nature. Many com­pa­nies rebound from restruc­tur­ing and emerge more refo­cused. For oth­ers, COVID-19 has accel­er­at­ed an inevitable decline. Proac­tive­ly recog­nis­ing the need to restruc­ture, col­lab­o­rat­ing with exter­nal firms and reduc­ing costs ear­ly is crit­i­cal to your suc­cess.

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