How COVID-19 Has Changed the Way M&A Deals are Executed

Figures on M&A deal volumes provided by Dealogic for 2020 tell their own story about how Covid-19 has impacted the mergers and acquisitions industry.

According to the company’s analysis, global Q1 2020 M&A activity was down 35% in value terms when compared to the same period in 2019, with the figure rising to 39% when looking at the US alone.

The figures hardly come as a surprise. As global supply chains ground to a halt, firms have been left to grapple with the reality of layoffs, deteriorating balance sheets and rising uncertainty.

As cash balances steadily decline and companies enter safety mode, one of the inevitable consequences is less M&A activity.

Deals which have already been postponed - or possibly even called off - are the proposed US$35 billion megamerger between HP and Xerox, SoftBank’s US$3 billion tender offer for WeWork shares (although we possibly haven’t heard the last of that one) and most notably, Boeing’s US$4.2 billion deal for Embraer.

But look beyond the negative headlines and M&A is remarkably resilient. A 35-40% fall is relatively stable when considered with drops in activity such as 50-60% (oil and gas), 70-80% (clothing retail) and 80-90% (commercial aviation).

The difference is that M&A now has a set of tools which allow it to weather such storms better than ever before.

The New Environment

In a previous DealRoom article, entitled ‘The virtualization of M&A,’ Kimberly Baird, Corporate Development Integration Lead at Cisco, talks about how the M&A process is evolving to become far more virtual thanks to tools like Cisco’s own WebEx and the virtual data rooms offered by companies like DealRoom and others.

The Virtualization of M&A

Reflecting the new reality that Covid-19 has forced upon us, a site selection executive for BDO, the world’s fifth largest accountancy and tax consulting firm told the Financial Times in May:

“In six weeks we’ve taken almost the entirety of the back offices of corporate America and moved them to kitchens and living rooms and it’s been pretty seamless.”

To sustain deal making at somewhere between 60 to 70% of 2019 levels, we can assume that M&A practitioners everywhere are adapting to the new environment better than those working in the vast majority of industries.

So what has changed for M&A practitioners in terms of how they do business during Covid-19?

Remote Deal-Making

In truth, many of the tools that M&A firms are using now already existed before the coronavirus hit in Q1 2020.

The difference now is that companies are now exploring the potential of these tools as they haven’t done before. Even someone as experienced in M&A Kimberly Baird at Cisco, when she encountered legal due diligence:

“I have noticed some unexpected benefits regarding the legal diligence process. We looked to use and augment our meetings with collaboration and tracking tools and we ended up better documenting the conversations. You always want to have assets and data that you can share downstream with teams, such as integration planning teams, so we took more time to structure and document the sessions in order to cover everything.”

This is one of the benefits that a previous article [insert link] mentioned when looking at the capabilities of good virtual data rooms.

In theory, the more dispersed teams become, the more important it becomes to keep them virtually connected - on one platform - and VDRs are the ideal antidote to this issue.

A new Generation of Businesses

As with any period of turbulence, the first half of 2020 has also created an opportunity for some entrepreneurs.

Most notably, food delivery firms have thrived, with some smaller restaurants closing the bricks and mortar component of their business altogether to focus on leaner delivery models.

Likewise, retailer of all kinds are now taking their entire operations online to sites like Amazon, Etsy and others.

The advent of these new companies also means M&A has to adapt. increasingly, M&A practitioners will be called upon to sell nearly entirely virtual companies.

Sometimes the owners of these companies will never even see their inventory – exclusively buying and selling through the cloud.

How will change management evolve to cater for companies where owners only ever talk to their staff by telephone?

Stability in Uncertainty

The prevailing climate in business during coronavirus has been one of uncertainty and this goes for M&A as much as any other.

Those postponed and cancelled deals mentioned at the outset of this article spoke about the impact it might have on their fortunes further down the line - in the case of the airline industry in particular, it’s extremely difficult to forecast too far into the future.

This uncertainty brought by the coronavirus forces M&A practitioners to step back and consider things, in practical terms, they never had to consider before:

How does consumption change now?
How does the way we interact inside business and outside change?
Is the coronavirus a one-off or something which will be revisited on a semi-recurring basis?

The answers to these questions then feed into which targets are suitable, what their risks are, how they should be integrated and how suitable valuations should be arrived at.

And underpinning all this should be change management - as important to M&A in a time of coronavirus as it is at any other time.

Conclusion

The fact that someone like Kimberly Baird, with 20 years in M&A is just discovering these benefits, shows how coronavirus may have some largely positive longer-term effects on the industry’s evolution.

Companies, their legal teams and investment bankers are learning that their technology gives them capabilities they didn’t know they even had.