- May 25, 2020
- Posted by: Ramkumar
- Category: Mergers And Acquisitions
Importance of M&A Mindset to Navigate The Current Crisis
Organizations that can swiftly adapt their tactics to the financial and humane shocks of the pandemic become best placed to rise from the crisis sound and profitable. With a mindset to M&A, companies can enable and also expedite these strategic shifts. Companies need to realize the importance of M&A mindest to navigate the current crisis by actively maintaining cash and invest—organically and inorganically—during downturns.
Importance of M&A Mindset – Continue investing—even during downturns.
The global magnitude of the COVID-19, followed by the broad ranges of infection progression and the plausibility that the next normal will need new strategies, are the few issues confronting organizations today. To pierce through this incertitude, managers will need to traverse a range of scenarios and generate plans to drive them.
Successful companies kept executing deals during the last crisis, though, profiting from lower valuations in the later stages of the crises and then expediting their pursuit from 2009 through 2012. They further attempted a more extensive array of transaction models, including minority investments and partnerships, used more noncash structures, and admitted higher-leverage ratios.
The COVID-19 crisis is unprecedented, of course, and the current economic recession will not unfold in the same direction earlier downturns did. The combination of unparalleled economic stimulus packages, low-interest rates, and strong signaling from central banks may assist cushion the shock and ultimately jump-start investment and consumer spending. Additionally, prices have plummeted distinctly for a range of commodities, from oil and copper to lumber, which may assist growth in many businesses.
Importance of M&A Mindset – Continue M&A during periods.
The overall sequence of M&A is changeable; deal making typically dwindles during an economic collapse and picks up over as the recovery effects to take grip. No one knows when the prevailing crisis will finish or how it will reshape markets or human functioning. During the last downturn, the organizations that employed a programmatic approach to M&A achieved excess returns with less volatility compared to other companies.
Importance of M&A Mindset – Renew corporate and M&A strategies—immediately.
The firms most likely to arise strongly from the COVID-19 crisis will be those agile enough to readjust to their unusual situations and turn their M&A activities toward the most appropriate and engaging opportunities before the next normal arrives. It will need a reassessment of their position in three domains: competitive advantage, capability, and confidence.
Rethinking competitive advantage
The COVID-19 crisis will question each corporate strategy because of its extent and surpass anything we have witnessed earlier. Similar to the Great Depression and world wars, it will accelerate a perpetual shift in people’s and organizations’ attitudes and habits.
In the business domain, managers will need to ascertain what is radically transforming in courses of market play and opportunity: which market shocks are short-lived and continually demand driving action to manage risk and generate new long-term opportunities.
M&A is a crucial enabler of corporate strategy and adds to the company’s performance. As they conceive about deal-making during the pandemic, managers should recognize the domains in which M&A is the most efficient tool to satisfy the company’s strategic goals and how its well-defined capabilities could supplement more value to M&A targets. The most valuable companies will generate comprehensive strategies for executing in priority areas, including distinguishing specific deal-screening criteria to narrow the scope of potential targets.
Importance of M&A Mindset – Evaluating capability in a dynamic situation.
Each crisis requires enormous organizational potential—to ensure security, balance, continuity, and transparent communications. M&A also demands expertise. Acquisitions need financing, but companies additionally require the skill, operations, and governance to deliver on every new asset’s promise. In a challenging and quickly evolving conditions such as this one, acquirers must conduct a careful appraisal of their ability to execute deals and integrate or separate from assets. They should examine the following guidelines when assessing M&A capacity:
Update capital analysis. Calculate how much capital can be judiciously deployed for M&A in the prevailing environment, recognizing that it has evolved but should not be zero in most cases. An estimate of the current capital structure should incorporate leverage and equity ratios, debt covenants, rating requirements, and investor expectations. The financial potential may shift quickly, so this evaluation should include a variety of scenarios and input from all management team members.
To extend M&A capability, scan to multiple sources of financing, including internal sources and debt and equity financing. Internal funding in times of crisis might involve explicitly prioritizing M&A over other earlier authorized capital investments or decreasing capital allocations to shareholders, principally by reducing share buybacks. Investors are not likely to recognize dividend reductions as becoming M&A financing. Leaders raising debt or equity should thoroughly evaluate lenders’ and capital markets’ receptiveness and the available pricing, given growing debt spreads and depressed equity valuations. Accelerated equity financing at more depressed levels can drive to higher dilution of current shareholders and should get marketed to investors with a crystal-clear justification and equity narrative.
An overview of M&A deal structures
Distinct types of deal structures can assist in offset risks and benefits among buyers and sellers. It is crucial to view potential structures along the ensuing three dimensions:
Upside for sellers
- Earn-out structures. The deal features portions of the purchase price based on financial success after the sale—for example, sales or profitability growth realized.
The upside for sellers and downside protection for buyers
- Seller to retain a stake. The deal includes minority investments or “less than 100%” transactions that can get linked with strategic partnerships.
- Relativistic contributions. The transaction-based on cash flow and EBITDA contribution alternately of a share-price exchange ratio or premium.
Downside protection for buyers
- Explicit warranties. The seller gives extended guarantees—for instance, about the nature of the business, historical financials, or litigation, and environmental risks.
- Phased payments. The purchase price is settled in multiple installments, possibly linked to buyers attaining key milestones after the sale.
Review integration approaches. To continue new M&A themes and to manage crisis-induced performance challenges, many acquirers will require to renew their integration tools and strategies. For example, the business may want to refocus on value creation as managers struggle to get back to pre-crisis operational levels. Transactions may attract more regulatory scrutiny and take longer to approve. To that effect, acquirers should reflect readjusting pre-close-integration planning and timelines to stay resilient and manage potential delays. They will also want to actively handle the expectations of key stakeholders, including employees and capital markets. Financial and operational pressures could trigger the call for the immediate restructuring of acquired targets.
And lastly, bridging corporate cultures, which is challenging in the best of times, will be tough when in-person communications are restricted. Personalized programs, such as scheduling more one-on-one and small-group videoconferences, will possibly be the typical successful ones. Senior management can utilize these channels to address critical integration questions. At the same time, frontline leaders operate virtually with their lately formed teams to get to know one another and handle day-to-day issues. Companies should prepare for another deliberate phase of cultural integration once the crisis abates, and employees start to return to work as usual.
Discovering and developing confidence
Confidence and audacity are rare in every crisis, but the capacity to respond swiftly and decisively is the answer to successful M&A.
Secure assurances to improve decision-making: The board will want to reach an agreement on M&A’s value in the crisis and post-crisis strategy, even as they are addressing other crucial priorities. They should collectively elucidate how the crisis needs a change in policy and how M&A and its distinct themes will facilitate the company’s outperformance in the ensuing normal.
To build the capacity and focus required for M&A, senior leaders should make a case for through-cycle M&A valuation and maintain expectations by establishing financial guardrails and setting boundary conditions. They should also identify who will drive the execution of M&A, from target identification and outreach to integration. To sustain alignment and versatility, many managers will conduct formal M&A working concourses with principal decision-makers to consider potential targets and priorities.
To eliminate decision-making roadblocks, some organizations will streamline their governance and formal approval processes, set transparent milestone deadlines, meet when required rather than at a set cadence, and carry a sense of urgency based on early-mover advantages.
Develop a through-cycle valuation aspect. A target’s more depressed valuation may draw a buyer, considering no structural changes to the underlying business. To secure the transaction possible, the acquirer may want to communicate the added through-cycle value-creation potential from the deal and increase the premium and offer creative structuring for the agreement.
Develop broad target lists for each M&A case. The most successful acquirers look behind apparent targets, including distressed assets, and thoroughly scrutinize the complete landscape to discover the most fitting candidates in their prioritized M&A themes. They, of course, assure that any acquisition gets anchored in strategy. Acquiring a distressed asset contradictory to the plan will not generate the value anticipated and could divert from other, more strategic pursuances.
Reach out to priority targets with a novel, tailored value propositions. Acquirers should be blunt about why a transaction makes sense now. Examples of tangible benefits may comprise a healthy balance sheet, robust infrastructure, resilient supply chain, trusted brand, and competent sales force. In addition to appealing financials, a compelling pitch customarily emphasizes an attractive vision tailored precisely to the target, including a clear business case developed on shared goals, values, and a commitment to reinvest in the business.
These discussions are the foundation for proactive deal sourcing—going past reviews of assets and values to foster relationships and offer a compelling value proposition that spells out the deal’s benefits to the target and its stakeholders. Within, business leaders should identify and reach an understanding on what is non-negotiable before initiating discussions with goals. Most flourishing deals are constructed on trust and shared values, not price per share.
Obscurity from COVID-19 and the human casualties it is taking make this crisis much more worrisome than several earlier global challenges. It’s unclear how long the pandemic will persist when a vaccine gets discovered or publicly available, or how much economic distress we will endure at the global, national, local, or personal level.