Ensuring your company is attractive to a merger or acquisition could be a solution for many facing the economic fallout of coronavirus. But how should both sides of the boardroom table prepare for successful M&A deals?
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.”
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.”