Are stress-driven restructurings driving M&A activity?
We saw a spike in bankruptcies and restructurings in the late second quarter and early third quarter, when lockdowns hit hard against many businesses. We expect more restructurings will come in 2021 as the coronavirus pandemic continues and support packages end. However, there was a relatively quick return to a near-normal level of mergers and acquisitions (M&A) after the initial shock of the first lockdowns. Many of the favourable underlying conditions driving M&A at the start of the year are still present. I am cautiously optimistic about the M&A market moving forward. The most affected sectors, including high street retail, hospitality, energy and mining, will see more consolidation. Technology and healthcare have been less impacted, but companies in those sectors may be open to interest from potential buyers because valuations are favourable.
How will the U.S. election result and vaccine breakthroughs affect the M&A market?
With news about vaccines and the U.S. election signalling a potential economic turnaround, many might see this as the time to start buying. Private equity firms are sitting on a massive war chest of around $2.5 trillion, which could serve as a catalyst for M&A in 2021. Improved investor and consumer confidence could mean fewer restructurings than we originally anticipated.
What challenges are M&A buyers and sellers facing in the pandemic?
Finding the right buyers or investors to approach a year ago wasn’t an overly difficult exercise. Now, it’s much more challenging because of the uncertainty pervasive in the market. Dealmakers are unsure which companies are actively pursuing M&A and whether once-active buyers are now focused on preserving cash. Previously, a company wishing to sell would have a list of, say, ten or twenty potential buyers to approach. Now, that number is significantly growing as sellers are casting a wider net. With more companies in the mix, the complexities of managing the marketing process increase, as do the concerns around information security, given the mounting reliance on remote communications. Also, due-diligence processes are becoming more difficult due to managing a deal team remotely. Another challenge the pandemic has highlighted is an increasing supply chain risk. In the global economy, supply chains can be more tenuous than many previously thought. Mitigating these risks involves solid supply chain due diligence, verifying how strong the chain is and identifying the weak links and disruption points.
How can buyers and sellers overcome these obstacles?
People adapt quickly, and different processes are emerging to continue doing deals in a remote environment. Preparation is important. You need advisers with good intelligence on what buyers and sellers are doing. Sellers should make sure they have all their information together and ready, so they can hit the ground running. Technology tools and bespoke solutions help buyers and sellers overcome these challenges and move quickly towards a deal. For example, virtual data rooms – online stores of information – provide insights into buyer behaviour and help narrow your list of buyers and smooth the due-diligence processes. There are many efficiencies to gain by running these processes remotely. Virtual data and other core technologies have been available for a while, but people need them much more during COVID-19. Driven by our new remote environment, extra functionality is added regularly to supplement those processes. For example, our virtual data room now integrates directly with Zoom. While Zoom wasn’t designed specifically for making deals, many companies are using it during the due-diligence stage instead of in-person meetings.
Is this the end of the handshake?
Not yet. People would still prefer to meet in person if they can. However, it is now possible to do a deal without ever meeting the opposite party. I have seen this happen this year many times.
How can companies address the challenges of remote deal-making?
The challenges are managing a disparate deal team, finding dispersed information and identifying key risks. These challenges can be overcome by using an integrated platform. An advanced platform will use artificial intelligence (AI) to automate M&A due diligence. The seller or investment banker can set up the information in a data room according to their checklist. Still, this information rarely aligns with how a prospective buyer or investor wants to see their information. The AI embedded in our solution automatically maps the buyer’s checklist to synchronise with the seller’s data. The result complements and accelerates existing workflows.
What barriers do they face in closing a deal and in post-merger integration?
After due diligence, one of the biggest challenges is when regulatory approvals are required. This is more challenging than ever due to the high scrutiny of certain transactions, particularly cross-border deals. Another difficult part of any transaction is post-merger integration when all the models and forecasting become real. Many buyers keep the virtual data room open to address these issues and use the platform as an information and collaboration conduit. Our clients regularly use our platform to help with regulatory reviews and post-merger integration.
Do you have any other tips for buyers and sellers?
Buyers and investors need to understand whether the drivers making companies distressed are short- or long-term in nature. Many companies rebound from restructuring and emerge more refocused. For others, COVID-19 has accelerated an inevitable decline. Proactively recognising the need to restructure, collaborating with external firms and reducing costs early is critical to your success.
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