- April 3, 2020
- Posted by: Ramkumar
- Category: Mergers And Acquisitions
M&A Strategy post COVID-19
The spread of COVID-19 definitely has an impact on global Mergers and Acquisitions activity. Hence organizations need to devise a suitable M&A strategy post-COVID-19 to sustain growth. During January and February, financial markets appeared to be rebounding against the fallout from COVID-19, the infection caused by the novel coronavirus. Some market participants believed that the virus could be limited initially to China or that countries with a robust health care system would not get caught as hard. Or, even if the virus were to become a global pandemic, they assumed that markets would respond the identical way they did in previous virus emergencies like SARS and MERS: with a little dip ensued by a sharp rebound. By beginning March, it was explicit that the COVID-19 disaster would act out adversely. The financial markets are now appraising in notable fallout from COVID-19 on the global economy, with a slowdown seen as more plausible.
First, organizations are focused on managing their employees and businesses secure in these tumultuous moments. Among growing skepticism, nevertheless, several corporate leaders are being urged to make strategic decisions. For instance, should they call off a deal that has been in the development stages for many months or drive it through to a conclusion? Has the leap of more than 30% in equity markets generated buy-side opportunities?
The Prevailing Situation Of the M&A market
Presently as the expanse of COVID-19 was expediting around the world, global equity indices touched historical heights. The MSCI World, S&P 500, and STOXX Europe 600 indices all finished at life highs on February 19, 2020. In a matter of weeks, the circumstances shifted dramatically. From their heights through March 18, 2020, these benchmarks dropped by 30% and 35%.
While the notable declines affect investors currently holding risky assets, it also signifies that the shutter for capital market access (known as the “IPO window”) terminated immediately. At the same time, the demand for leveraged debt financing appears to get closed for now, and private-equity firms are saying their deal teams to hold down.
Turbulence in capital markets is usually a harbinger of what follows next in the real economy. Most afflicted countries will possibly undergo a recession this year.
The M&A market, typically, is influenced by the decline of capital markets and the real economy. Ere the crisis, the number of M&A deals globally was then on a slender descending bearing. This drift is likely to quicken, at least in the short-term. Historically, the M&A movement has associated strongly with the growth of stock prices and risk, as marked by implied volatility.
The short-term impacts on the M&A market are apparent in the fact that many deals have been drawn or paused in recent weeks. The retreats were partly due to COVID-19-related anxieties and shifting deal conditions, such as reconstructed business plans. At the same time, many businesses are likely to defer their not-yet-announced acquisition plans, owing, for instance, to the financing challenge and contract negotiation complexity generated by the crisis.
Notwithstanding these short-term spreads, the longer-term repercussions of COVID-19 on the real economy remain unknown. Nonetheless, even if slightly short-lived, adverse impacts on growth and fundamentals appear almost unavoidable.
What should be the right M&A Strategy?
When dealmakers can concentrate anew on their core pursuit, they will have lots to consider. For businesses that have built a strong balance sheet through the economic growth of the prior ten years, diminishing valuations generate opportunities to seek deals that make long-term value.
More depressed valuations are not the sole reason that weak-economy transactions exceed. In a public takeover, the discount when acquiring targets might be cheaper than anticipated because shareholders need significant premiums. Assets currently held by private equity investors will see higher-than-average incentives, at least to some extent.
There is a more significant purpose why acquisitions in weak economies generate value: A business can gain the advantage of the situation to accomplish its strategic acquisition program and to put the firm to beat industry-average growth once the economy improves and quickens out of the slowdown. Additionally, a business can concentrate on integrating the target during the downturn—when competitors get occupied striving to survive—and then wholly profit from synergies in the recovery.
What are the leading M&A strategies post COVID-19?
There are various attractive strategies for executing M&A transactions in a vulnerable economy:
- A perspective beyond your core business. While acquiring targets in the core business through a downturn builds value, one can profit even more further from non-core acquisitions.
- A study of veteran dealmakers. Acquirers that frequently involve in M&A make returns from downturn deals that are five times greater than those achieved by sporadic dealmakers. In the prevailing situation, veteran dealmakers can completely leverage their well-honed, structured method. It implies leading a directed due diligence process (without being rattled by external pressures), marshaling scenario planning to get qualified in a fast-changing climate, and rigorously integrating targets to jump-start value creation.
- Value creation is critical. When acquiring underperforming assets through uncertain economic times, even seasoned dealmakers generate value in barely half of their deals.
- Contemplate de-risking the M&A strategy. If the prevailing disaster is hitting the specific industry, contemplate marshaling tools different than downright M&A. Developing strategic alliances, for instance, could be a means to fix short-term supply chain problems.
Additionally, corporate decision-makers can exercise many tangible actions now:
- Plan. If you don’t have a dream list of targets that suit your strategic plan, consider developing one currently. There might be purchasing opportunities soon.
- Don’t panic. Now is not the moment to drop assets, possibly at fire-sale prices—even if investors might like spinoffs and divestitures in the short-term. In the lengthy run, panic-selling does not generate value. In any case, the shutter for IPOs and other sorts of divestment has finished.
- Be strong. The prevailing circumstances might entice you to cling with what you understand. But it is the audacious dealmakers that use downturns to get forward of the curve and evolve out more powerful.
Corporate decision-makers have no readymade playbook to sail this novel global health and financial disaster. A specific amount of improvising will be needed to sustain the crisis and accelerate out of the ultimate recovery. For businesses with sound balance sheets, M&A will represent a vital role. Preparation, calm nerves and a zeal to be brave are the clues to victory.
[…] I think there are genuine reasons to be confident that the transactions market will recover, and quite vigorously. The world has evolved, but change can often be a significant spur to reform. However, before the crisis gets in check and confidence gets revived, prophesying the timing, the scale, and the state of that revival remains a topic of speculation. […]