To celebrate its anniversary, the M&A Community is launching a series of key takeaways from previous discussions with experts, looking back at the visions that helped build its global network of dealmakers while looking forward to the complex and ever-changing future and the many opportunities it presents.
What are the general drivers of the 2021 M&A boom?
M&A consolidates as a crucial path for building digital capabilities in this ever-changing and sophisticated market
COVID-19 permanently changed how organizations interact with their internal and external stakeholders, particularly how companies now reach their potential customers. The pandemic amplified the need for a technology component, which is now present across all industries, including the most traditional ones. Technology has profoundly changed the market and how organizations interact within it. The fiscal uncertainty and political climate have increased company consolidations and portfolio realignments that stimulate M&A transactions.
This urgency stems from a market experiencing dramatic transformations while business models shift towards digital and companies accelerate consolidations.
It used to be quite clear whether an entity was pursuing an M&A. Today, we see companies trying to prepare for multiple transactions, for instance, M&A and IPO altogether, the so-called dual track, without necessarily choosing one or the other until later. This preparation changes how companies arrive in the market and organize themselves in a world with more opportunities than ever.
Because of these changes, if your company is pursuing an M&A now, preparation is a must and the key to success, regardless of your industry. Prepare your talents and processes, invest in technology, and above all, be ready with structured corporate governance.
“In a market with so many local and international investors looking for opportunities, we cannot afford to miss chances. Preparing for whatever purposes to start now; it is a prerequisite and the only way not to miss opportunities,” states Jose Setti Diaz, Partner at Demarest.
How do executives better prepare for their first deal?
It is crucial to have the right people in the right places. Get the help of experienced advisors and professionals who know the process and who will be able to guide you, saving time and reducing efforts while at the same time increasing your chances of success.
“It is paramount that company culture is geared towards a publicly-traded company. A common and not so easy challenge to overcome is the mentality of hiding or guarding information.” – Reinaldo Grasson, Financial Advisor and partner at Deloitte.
With going public comes new obligations and changes to shareholders’ mindsets. There are now partners; shareholders are no longer the exclusive owners. For instance, family companies that were used to making decisions and defining financing and investment plans by themselves now have stakeholders they must satisfy. This mindset change must start as early in the preparation process as possible.
“Once the company’s mindset and culture change are underway, the organization must undergo a professionalization process, which can be gradual or quick, depending on the timeframe. Bringing a fund is a way to go through this process with a more step-by-step structure,” concludes Lia Ferrua, Managing Director at Private Equity Group.
When a company gets its first investor, it often makes the necessary changes, such as establishing a board, organizing committees within the company, and establishing frequent audits. The sooner these changes are implemented, the easier it will be to follow the IPO path.
Audited financial statements are necessary, having a well-oiled internal process for preparing financial statements to meet the deadlines required after going public.
Additionally, new procedures must be in place, for example, an audit committee with independent members who will play a crucial role in reviewing the financial statements. Moreover, corporate governance needs to be well set up and structured and be embedded within the company’s culture by the time it goes public.
What are the key differences in preparing for an M&A depending on the sector or the type of company?
Recently the bulk of M&A market transactions have been in the technology sector, and the COVID-19 pandemic has accelerated this process. We are undergoing significant changes in business models, motivated not only by disruptive technologies entering the market but also by changes in consumer behavior. This last is being affected by rising inflation and interest rates, exacerbated by the impact of the war in Ukraine on global energy prices. However, this is also expected to present opportunities for the energy sector. We are also seeing ESG having a more prominent role in Board decisions.
Regardless of the sector, traditionally, M&As were driven by the consolidation of companies in search of synergies, efficiency, and operational excellence. M&As were primarily horizontal, in the same sector, expanding on what companies already did. However, with all the disruptive technologies changing the way we do business, it is no wonder that companies from all sectors, including the more traditional ones, are increasingly acquiring companies intending to create an end-to-end ecosystem.
“Private Equity and Venture Capital funds contribute capital, governance, systems, and internal controls, while start-ups bring entrepreneurship and innovation values. Together, the different organizations make scalability occur quicker with capital and management expertise,” adds Reinaldo Grassom, Financial Advisor and partner at Deloitte. In other words, these new ecosystems are significantly changing how we view the market and investment opportunities.
Let’s say one decides to seek an M&A or an IPO; What are the very first steps?
Once the company decides it wants to seek an M&A or an IPO, the first step is to start with the internal professionalization of all areas. Having a well-organized legal department within the company, establishing compliance criteria, having a well-established financial department and a controller, and starting the whole auditing process, even if it is not a complete audit, are required.
Another one of the first steps is to hold monthly meetings where results are disclosed, even if they are internal for the shareholders. Ideally, there should be at least one external board member.
How long does an IPO or an M&A take in general?
“Several factors will influence the timeline. The size of the company is the first element to consider. To make an offering, you need to have robust numbers, even though today’s market has the liquidity to accept smaller companies,” confirmed Fabio Cruz, Partner at Deloitte.
Next comes registering the company as public, which can occur parallel to the offering registration. Some processes take three months, others longer.
Of course, this does not include all the legwork, preparing the company to have its financial statements audited according to Brazil’s SEC requirements. There’s a long road to travel for an IPO with a solid investment project. An M&A will take less time to begin the process, but on the other hand, it will generally take longer once started, particularly the contract negotiation phase.
The timeline has a lot to do with the company’s level of maturity. Six months would be the minimum time to allow for preparation. However, this process can be expedited if the company has already been audited and has appropriate management. It is just a matter of reorganizing, adding members, or changing some parts of the organizational structure.
What are the key challenges the day after and beyond?
Professionalization involves people, skills, entrepreneurship, and innovation. Investors often fund a company because of its entrepreneurial profile, innovative characteristics, or the qualities the company has before it goes public. The professionalization process must not lose sight of retaining talent and those with it. Aim to have the right people in the right places dealing with compliance, governance, investor relations, and market interaction. Retain those innovative people who add value to what the company sets out to do. It must be crystal clear where the company wants to go and who are the right people to take it there.
Considering the post-COVID market, will the M&A and IPO growth continue? Is it a sustainable trend?
We are seeing consolidation transactions of all types and sizes, including million-dollar transactions and vertical acquisitions, as well as creative and unexpected deals to provide innovative ecosystems to service end-consumers. “Everyone wants to invent the right technology that influences the value chain of a company,” adds Jose. Consequently, technology and science will continue to replace certain supply chains; if you want to predict future opportunities, ask yourself what will replace those supply chains.
So yes, “the M&A and IPO trend will continue to accelerate in the coming years as industries undergo this widespread technology-based transformation!” concludes Reinaldo.