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M&A in a different world: getting used to the “new normal”

  • 2020 looks like it will end with a deep recession with a robust rebound expected in 2021. 
  • Faced with a lot of turbulence, businesses are looking for alternatives to traditional M&A.
  • ESG is playing an increasingly important role in the valuation of targets.
  • The ‘New Normal’ for M&A transactions has to go beyond the usual scope of analysis and preparation. 

2020 has once again shown the business world that it is impossible to be ready for everything. The pandemic has dramatically changed how companies, societies, and governments function. There is not a single industry that has been left unimpacted by the repercussions of Covid-19. As these challenging times have taught us, flexibility and adaptability are the key qualities businesses need to help them to weather the storm. 

The global economy may face a difficult road back from the pandemic-caused downturn, IMF chief Kristalina Georgieva projected Nov 19th. As the latest World Economic Outlook shows, this year is expected to end with a deep recession, namely -4.4 percent. This number was optimistically revised from the previous projection of -5.2 percent following a more substantial recovery in Q3’20. ‘In 2021, the IWF projects growth to rebound to 5.2 percent’. 

Looking for alternatives

Meanwhile, the financial world is preparing for a post-Covid reality, sometimes labeled as the ‘new normal.’ This reshaping of traditional processes and frameworks is impacting the M&A sphere as well. The very definition of mergers and acquisitions is broadening. Alliances, partnerships, and joint venture transactions are increasingly on the table. 

Various alternative investment tools are emerging to help companies withstand hardship. As this Deloitte report shows, 42% of the companies surveyed are most interested in exploring alternatives to traditional M&A. 

Aside from the pandemic, what is paving the road to the rethinking of traditional M&A deals?

  • An abundance and availability of new technologies, from artificial intelligence and machine learning, up to predictive analytics. 
  • Big Data and its increasingly wider use in M&A deals. Insight, drawn from large amounts of data, helps to design M&A strategies, validate business models, as well as create reliable valuation models.
  • Growing access to crucial market information and real-time analytics.
  • The transfer of popular management approaches (such as LEAN or Six Sigma) applied to the legal side of M&A transactions.
  • The forced ‘remote’ trend and growing opportunities to build business processes online, including partnering with clients and various service providers (such as legal, tech, data science, etc.) 

Global Trends Around the Pandemic and Beyond

Aside from dismantling economic forecasts, 2020 has boosted several tendencies emerging in the world. Political and geopolitical tensions worldwide may also hint at the events we might see in the nearest future. What are the main currents in the global sea?

  • ‘Techceleration’ and remote working. Lockdowns and other restrictive measures have substantially increased the role of technology in our lives. Many tech companies have already announced that they will not limit working from home even after the pandemic. Moreover, the role of ‘digital natives’ in the workforce is growing. Looking ahead, one can expect further evolution and adoption of new and potentially disruptive business technologies to shape the way we work remotely.
  • Cost-effectiveness as a priority. The proper management of expenses has proven itself as one of the cornerstones of business stability. Companies are undergoing restructuring in order to keep up with surging revenues and to maintain their cash flow.
  • Growing tensions between businesses and governments. The Huawei and TikTok cases may have just been the tip of the iceberg. Businesses are forced to play on a two-layered chessboard. On one hand, they face pressure from officials and regulatory bodies; on the other, they face social pressure (concerning topics such as environmentalism and social justice) from their employees and business partners. 
  • An increased focus on CSR. The Covid-19 situation has increased the importance of corporate social responsibility. Employees, clients, and partners expect, more often than not, for a business to do ‘the right thing’. Along these lines, purpose-driven economic activity such as impact investing continues to grow in popularity. 
  • ESG is on the rise. Complementing the previous point, one cannot omit the environmental, social, and governance matters which increasingly influence the M&A process. Thus, the buy-side strives not only to evaluate a target’s previous record of compliance with ESG requirements but also weighs the potential risks it may face in the future. The sell-side, consequently, wants to assure itself that assets sold will be managed with ESG in mind after the deal closes. 

What to Consider During a ‘New Normal’ M&A Deal?

There is hardly any doubt that M&A will not be the same after the lessons of 2020. Here’s what we can anticipate going forward. 

  • Thorough examination of business models. As the market dynamics have substantially changed, it is worth conducting a detailed analysis of the market to understand how it has been impacted, what customer needs currently are, and how the industry landscape and its perspectives have changed. Gone are the days when EBITDA alone will sufficiently evaluate the profitability of a deal. 
  • Due diligence goes beyond mere statistics. It is becoming increasingly important to evaluate business positioning and management strategies in relation to the current market. Businesses need to show a readiness to meet new challenges and to respond to the increasing demand expected from an economic recovery.
  • Subjectivity of valuations. During M&A Community webinars, we have heard a lot of concerns about market volatility. Valuation processes have become more complex than ever. There is no clear answer to this conundrum. However, most agree that evaluating parties can look at the various base, optimistic, and pessimistic cash flow scenarios to try to get a more accurate picture of an M&A deal. 
  • Thinking of the risks. In the current business climate, completion mechanisms and sales and purchase agreements (SPAs) may become the tools to tackle uncertainties during a deal. A recent trend shows a shift to completion accounts instead of the ‘locked box’ account approach. These approaches help businesses to minimize the risk around their balance sheets. 

The effects of the pandemic and the measures to contain it are poised to impact the global economy over the next 12 to 18 months. Nevertheless, there are already signs of an M&A ‘revival’, at least in some industries. One can expect that this resurgence will continue in 2021, while cross-border M&A transactions will return to their previous intensity.

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