Is the pandemic of the coronavirus and the corresponding economic crisis a time to postpone or seek acquisitions? High profile examples of each one are available. For instance, Boeing scrapped a $4 billion offer to buy 80% of the commercial jet company of Embraer and a 49% stake in a joint venture that manufactures a new military cargo jet. At the same time , companies such as Google Cloud, Nestle SA, BlackRock, Boohoo, the British apparel group, and others have all publicly announced that amid the confusion caused by coronavirus, they are open to acquisitions.
The M&A Leadership Council questioned 50 C-level executives and senior business growth officials about their strategies in order to learn how businesses are thinking about acquisitions right now. Respondents included seasoned domestic and foreign acquirers, from banking and financial services, software and telecommunications, healthcare and pharmaceuticals, and technical services, from a representative cross-section of sectors. The sizes of respondent firms were divided across representative sales groups, with 25 percent greater than $5 billion, 20 percent respectively from $1-5 billion and $100 million-$1 billion, while the remaining 35 percent had revenues of $10-100 million.
We asked five key questions to determine the effect on: 1) existing deals in progress at the time of the crisis struck, 2) estimated scale of the 2020 contract, 3 ) strategic “contract-type” targets in the immediate future, 4) M&A organisational issues during lockdown and shelter-in-place requirements, and 5) internal M&A capabilities.
Deals Currently
In the poll, a “temporary break” in current transaction action was suggested by more than half of respondents (51 percent) to give time to determine the future business recovery timetable or to postpone planned deals at an early transaction stage, such as letter of intent or preliminary due diligence. A further 14 percent of respondents suggested that on all new offers they were at instant deal-stop. However, we found that late-stage deals are already being done: roughly 12 percent of respondents said they were expediting late-stage deals to a swift closure of contracts, and another 12 percent of respondents said they completely planned to continue with closure in compliance with effective valuation or terms renegotiation. The remaining 11 % of respondents clearly reported that it was “unknown or not relevant.”
Amount of Deal
With respect to the projected deal volume for the remainder of 2020, our second issue, it is not shocking that 26 percent of respondents understand that their planned future deal volume is planned to be dramatically reduced for Q2-4 2020. Similarly, there is little relief from the fact that a large number of consumers (51%) plan to continue on a temporary pause until the timing and extent of economic growth is clear by the end of 2020.
The data shows a significant and inspiring counterintuitive growth plan for those executives and businesses willing to turn crisis into potential, amid this sobering, if predictable reporting. We noted a large percentage (23 percent of respondents) reporting either “no effect on the volume of the 2020 projected contract” or their plan to “accelerate” the volume of the contract over the rest of 2020 on the basis of the increased amount of opportunistic objectives or more palatable valuations triggered by the crisis. Further study of these respondents provided invaluable lessons before and after Covid-19 for other executives and deal-makers planning to expand their businesses.
Four corporate actions started to emerge among the executives currently exploring acquisitions. Next, some firms pushed rapidly to target opportunistic hotspots for M&A. Choose your “dance mates” now in the most exciting growth tools, solutions, and industries for those professional acquirers with a healthy appetite, strong balance sheets, a buoyant stock price or ample credit facilities to achieve first-mover edge when other prospective buyers are either in denial or working out next moves. This is demonstrated by Verizon’s newly announced definitive deal to purchase BlueJeans Network, a pioneering enterprise-grade video conferencing and event site. Verizon strategically plans to exploit and improve its own new 5 G technologies to create far more sophisticated video conferencing services, more than just an adjacency extension arrangement.
Buyers who need to digitally transform, innovate new business structures to reposition post-Covid industry realities or boost the commercialization of the most exciting innovations, medical developments and distribution models are waiting for other opportunistic hotspots.
“Objectives” Deal-Type
Fourth, some firms are broadening the reach of future new targets of the form of contract. In our poll, 57 % of respondents emphatically confirmed their plan in previous years to try to do strategic sales growth deals close to their main acquisition approach. However, the data also shows that experienced corporate acquirers are shopping through several different strategic deal styles at the same time, with 49 percent signalling their plan to purchase distressed enterprises opportunistically and 23 percent targeting completely new , non-core technologies, solutions, or segments to further diversify future revenue mix.
There are not many major comparisons between the 2020 Covid economic downturn and the 2008-09 Great Recession, but one factor that can also be instructive is the projected rise in divestitures: 23 percent of survey respondents suggested possible divestitures as they collect cash for debt service or strategically invest in post-Covid growth prospects.
Finally, respondents expect ongoing regional extension agreements (40%), ongoing cost-taking and restructuring agreements (26%), and “survival marriages” (6%).
Challenges of M&A
Fourth, they are trying to close the value divide dynamically. Sellers will be in great demand, especially those representing the most exciting plays in the pandemic and recovery period, and will likely have several potential suitors. Valuation, contract structure, the right growth rewards, and talent management would need to be imaginative, persuasive, and still easy enough to be credible to win the bid. Sellers will wait, by and wide, for those firms most seriously harmed by Covid and economic lockout before a new value consensus arises or before profit and loss statements rebound with time.
Your imaginative bridge to the perceived value difference is likely to be the secret to enticing a deal to close in the near run with this sort of acquisition goal. This involves a degree of study and due diligence and dialogue with the seller that many consumers are only starting to grapple with. For instance, with regard to the 2020 financial review, to what degree have main fundamentals, competitive pressure or other internal or external influences influenced the precipitous decline in sales and income vs. solely Covid-related impacts of the target? Will purchasers consider these “Covid add-backs” to the EBITDA of the seller? Likewise, how can the management team confirm and be happy with the economic improvement and stabilisation agenda of the target organisation, pro forma forecasts, priority programmes and spending?
Internal Skills of M&A
Finally, survey respondents indicated that internal M&A resources are shoring-up. A level of internal M&A capacity beyond what is currently in place in several organisations would be needed to operationally conduct M&A centrally after the recession and during a still highly unpredictable economic recovery, through all transaction phases and through several different transaction-type scenarios. We have traditionally made four to five acquisitions to divestitures per year, as one highly sophisticated multinational acquirer claimed. Post-Covid, a once-in-a-generation sea shift in the business environment and future target businesses that might be available are fairly expected. We need our contract volume to raise our baseline by 2-3X to get where we want to be strategically.
If the business has to do one contract or 20 to accomplish the form of post-Covid strategic repositioning, use the temporary pause strategically now to speed up the execution of the previous transaction integration backlog. Upgrade operational systems, playbooks, software tools, capabilities and services for M&A to facilitate smooth remote operations for any form of transaction, in any business setting and at a transaction volume level that will sufficiently meet the strategic priorities for crisis recovery.
In any setting, mergers and acquisitions are famously complicated, and post-Covid, they could be much harder. “Even the most professional acquirers may find it difficult to overcome other real-time acquisition obstacles by putting aside political sabre rattling from the newly proposed” Pandemic Anti-Monopoly Act. It’s been over 10 years since we’ve even talked of doing a distressed purchase, as one informative survey respondent suggested, and I’m not sure we’ve ever got a blueprint for that.” And from another, “divestitures can’t be called ‘acquisitions spelled backwards’ because they have a very different valuation curve than traditional acquisitions.” Ultimately, one respondent stated, “the extra cybersecurity acquisitions
Corporate investors who wisely plan to make hay during this traumatic and unparalleled global earthquake will be the ones most worthy of winning as economic growth recovers, far from being out of operation by 2020.
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hbr.org
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