Very pertinent question, these are extraordinary times. What to do during the Coronavirus pandemic or another natural disaster which disrupts regular operations and the economy on multiple levels?
Making the right call is a material responsibility when people’s health, safety and incomes can be critically impacted. Various response options may be available depending on restrictions imposed, social responsibility and the phase when disruption occurs in the M&A timeline, including:
The Preparation Phase
• Still time to make a decision, can play it by ear.
• Lowest cost point to delay or cancel the transaction.
• Determine the future options if the deal is cancelled today.
• Examine how options available may change over the next days, weeks and months.
The Transaction Phase
• Examine if the worst case scenario for moving forwards is still acceptable.
• Determine the make-or-break date, scenarios to call off the transaction, and costs.
The PMI Phase
• Re-evaluate the potential for benefits from the combination, comparable to what it would have been individually under the same economic situation.
• Does the business case still make sense, and if not how can it be revised using available resources.
Many other actions can be undertaken depending on the specifics of the situation, but whatever actions are taken its best to engage the shareholders ASAP. People are probably feeling even higher levels of uncertainty, compared to the already high levels associated with an uninterrupted merger. Immediate and thoughtful communication, even just on decision making timelines or frameworks, is critical in salvaging morale. The change management investment may need to be increased in order to meet retention and cultural goals.
Regarding how the pandemic will affect overall M&A activity, it may have changed where we are in the business cycle. Combined with the wider economic and debt conditions, including areas such as the travel industry and oil war, the reasons driving M&A activity are potentially changing. Different reasons can drive mergers depending in part on the current state of the business cycle which includes:
1) Expansion. The economy has been trending up rapidly since the crash of 2008, with a brief retraction in 2018 but still continuing up until a peak on February 2nd 2020. Reasons for M&A in an economy trending up include:
• Higher growth companies
• Accessing more capacity in talent
• Accelerating R&D
• Regional roll-ups
2) Peak. For years the business cycle has been topping, from the view of most common indicators. It may still be in the top stages of the declining process. Reasons for M&A in the top quarter of the business cycle:
• Benefiting from market leadership
• Access technology to avoid digital disruption
• More available public and private capital markets
• Product or market expansion
• Accessing more revenue and accelerating revenue growth
3) Recession. We have been overdue for a downtrend, and now we are in one. However it may still be within the upper portion of the downwards cycle. Reasons for M&A in a trending down economy:
• Opportunity to get market leadership
• Get an edge over competition with technology to protect market share
• Interest rate policy stimulus / ZIRP
• Reducing cost
• Reducing risk, improving agility and resilience
4) Trough. We are probably not here yet, but time will tell. Reasons for M&A in the bottom quarter of the business cycle include:
• Better value / lower risk
• More available and motivated talent
• Debt restructuring and distressed asset purchases
• Reducing industry capacity / consolidation
• Convergence of industries / deteriorating industry barriers
Currently, we are somewhere near the end of stage 2 in the top quarter, or in stage 3 of a declining trend. However secular factors may also be changing either due to, or sparked by the current economic deterioration.
• As people and companies learn to work from home they may experience benefits such as the potential for a larger workforce without expanding facilities overhead, time in transit, environmental aspects, access to talent with young families, health reasons, etc. Post crisis, firm’s may retain a higher mix of home to office work. For example when a team switches to 4 days in the office and one day at home per person, they can utilize much of the same space to support an extra 25% staff.
• Companies may learn ways to reduce costs and help secure production robustness by automating further and using technology to operate with less staff.
• Dramatic revenue changes can result in smaller or distressed companies being discounted for acquiring, or being liquidated at low prices.
• Additionally, in downturns, people are uncertain or have been laid off, increasing the importance of having a job. This leads to higher availability of skilled labour in the short term. In the longer term it leads to lower availability, as people relocate or specialize into fields where there is higher demand relative to supply of labour, with consideration of barriers to entry.
In these extraordinary times, deteriorating secular trends and a downwards business cycle may be fuelling the need for M&A functions, in order to restructure parts of the economy.
