What M&A Looks Like During the Pandemic

by Mark Herndon and John Bender - June 10, 2020

Is the coronavirus pandemic and corresponding economic downturn a time to halt acquisitions or pursue them? There are high profile examples of each. Boeing, for example, has abandoned a $4 billion deal to acquire 80% of Embraer’s commercial jet business and a 49% stake in a joint venture producing a new military cargo jet. At the same time, companies such as Google Cloud, Nestle SA, BlackRock, the British clothing company Boohoo, and others have all publicly stated that they are open to acquisitions despite the uncertainty created by coronavirus.

To understand how companies are thinking about acquisitions right now, the M&A Leadership Council queried 50 C-level executives and senior corporate development leaders about their plans. Respondents included experienced domestic and global acquirers from a representative cross-section of industries including banking and financial services, software and technology, healthcare and pharmaceutical, and professional services, among others. Respondent company sizes were distributed across representative revenue segments including 25% greater than $5 billion, 20% each from $1–5 billion and $100 million–$1 billion respectively, while the remaining 35% had revenues from $10–100 million.

We asked five key questions to assess the impact on: 1) current deals in process at the time the crisis hit, 2) anticipated 2020 deal volume, 3) top “deal-type” strategic objectives in the near future, 4) operational challenges of M&A during lockdown and shelter-in-place requirements, and 5) internal M&A capabilities.

Current Deals

In the survey, more than half of respondents (51%) indicated a “temporary pause” of current deal activity to allow time to assess the potential market recovery timeline or to delay anticipated deals still at an early deal phase such as letter of intent or in preliminary due diligence. A further 14% of respondents indicated they were at immediate deal-stop on all current deals. We did find, however, that late-stage deals are still getting done: approximately 12% of respondents said they were expediting late-stage deals to a quick transaction closing, and another 12% of respondents said they fully intend to proceed to deal closing pursuant to successful renegotiation of valuation or terms. The remaining 11% of respondents simply indicated “unknown or not applicable.”

Deal Volume

With regard to forecast deal volume throughout the remainder of 2020 - our second question - it comes as no surprise that 26% of respondents acknowledge their anticipated future deal volume for Q2-4 2020 is expected to be substantially reduced. Likewise, there’s no escaping the fact that a sizeable majority of acquirers (51%) anticipate remaining on temporary pause until the timing and nature of economic recovery is evident through late 2020.

In spite of this sobering, if predictable news, the data reveals an important and encouraging counterintuitive growth strategy for those executives and companies prepared to turn crisis into opportunity. We noted a significant percentage (23% of respondents) reporting either “no impact in 2020 forecast deal volume” or their intent to “accelerate” deal volume during the remainder of 2020 based on the increased number of opportunistic targets or more palatable valuations brought about by the crisis. Further analysis of these respondents provided vital insights for other executives and deal-makers intent on growing their companies during and after Covid-19.

Among the executives still pursuing acquisitions, four strategic actions kept surfacing. First, those companies were moving quickly to exploit opportunistic M&A hotspots. For those skilled acquirers with a strong stomach, strong balance sheets, a buoyant stock price or sufficient credit facilities, pick your “dance partners” now in the most promising growth technologies, solutions, and sectors to gain first mover advantage while other prospective buyers are still in shock or sorting out next steps. Verizon’s recently announced definitive agreement to acquire BlueJeans Network, a leading enterprise grade video conferencing and event platform illustrates this play. More than just an adjacency expansion deal, Verizon strategically intends to leverage and grow its own emerging 5G technology to produce much more advanced video conferencing capabilities.

Other opportunistic hotspots await buyers needing to transform digitally, innovate new business models to reposition for post-Covid market realities or accelerate commercialization of the most promising technologies, medical advancements and delivery models.

“Deal-Type” Objectives

Third, those companies are broadening the scope of potential new deal-type objectives. In our survey, 57% of respondents emphatically indicated their intent to continue to do strategic revenue growth deals similar to their core acquisition strategy over prior years. The data also suggests, however, that skilled corporate acquirers are simultaneously shopping across multiple different strategic deal-types, with 49% indicating their intent to opportunistically buy distressed companies and 23% targeting entirely new, non-core technologies, solutions, or segments to further diversify future revenue mix.

There aren’t many meaningful parallels between the Covid economic crisis of 2020 and the Great Recession of 2008–09, but the anticipated increase in divestitures is one aspect that should still be instructive: 23% of survey respondents indicated likely divestitures as they raise cash for debt service or to strategically invest in post-Covid growth opportunities.

Finally, respondents anticipate continued geographic expansion deals (40%), continued cost takeout and consolidation deals (26%), and “marriages of survival” (6%).

M&A Challenges

Fourth, they are working to creatively bridge the valuation gap. Sellers, especially those representing the most promising pandemic and recovery era plays will be greatly in demand and will likely have multiple potential suitors. Valuation, deal structure, the right growth incentives, and talent retention will need to be creative, compelling, and  yet simple enough to be convincing to win the bid. For those businesses more severely impacted by Covid and economic lockdown, sellers will, by and large, wait until a new valuation consensus emerges or until profit and loss statements recover over time.

For this type of acquisition target, your creative bridge on the perceived valuation gap will likely be the key to enticing a transaction to close in the short-term. This calls for a level of due diligence analysis and dialogue with the seller that many buyers are just beginning to grapple with. For example, with respect to 2020 financial analysis, to what extent have core fundamentals, competitive pressure or other internal or external factors impacted the target’s precipitous drop in revenues and profits vs purely Covid related impacts? Should buyers accept certain “Covid add-backs” to the seller’s EBITDA? Similarly, how should your leadership team validate and get comfortable with the target company’s economic recovery and rebound plan, pro forma projections, priority initiatives and spend?

Internal M&A Capabilities

Finally, survey respondents reported that they are shoring-up internal M&A capabilities. To operationally execute M&A remotely during crisis and through a still highly uncertain economic recovery, across all deal phases and across multiple different deal-type scenarios will require a level of internal M&A capability beyond what is currently in place at many companies. As one highly sophisticated global acquirer stated, “We have historically done four or five acquisitions or divestitures per year. Post-Covid, we reasonably expect a once-in-a-generation sea change in the market landscape and potential target companies that may be available. To get where we want to be strategically, we need our deal volume to increase by 2–3X our baseline.”

Whether achieving that type of post-Covid strategic repositioning requires your company to do one deal or 20, strategically use the temporary pause now to accelerate completion of prior deal integration backlog. Upgrade M&A operating processes, playbooks, software solutions, skills and resources to enable seamless remote operations for any deal type, in any market environment and at a level of deal volume that will adequately support your crisis recovery strategic objectives.

Mergers and acquisitions are notoriously difficult in any environment and post-Covid, they may be even harder. Setting aside political sabre rattling from the recently proposed “Pandemic Anti-Monopoly Act,” even the most skillful acquirers may be hard-pressed to navigate other real-time acquisition challenges. As one insightful survey respondent indicated, “it’s been over 10 years since we even thought about doing a distressed deal, and I’m not sure we ever had a playbook for that.” And from another, “divestitures can’t be considered ‘acquisitions spelled backwards’ because they have a completely different value-curve than typical acquisitions.” Finally, one respondent said, “the additional cybersecurity risks that may be incurred from extensive work-from-home operations makes careful due diligence all the more important.”

Far from being out of action through 2020, corporate acquirers that strategically determine to make hay during this painful and unprecedented economic earthquake will be the ones most able to prevail as economic activity rebounds.

Mark Herndon is the chairman of the M&A Leadership Council.

John Bender is president of M&A Partners, a consulting firm.