Navigating the New World of M&A and Integration Part II: Preparing for tomorrow’s opportunities

Navigating the New World of M&A and Integration Part II: Preparing for tomorrow’s opportunities

In this post, the second of four in the series, BTD UK Partner Carlos Keener shares our clients’ perspective on how to prepare for the opportunities for M&A that are soon to arise from the new economic conditions. You can read the first post in the series discussing immediate challenges facing deal makers and integrators here.

 

The initial economic shock caused by the CV19 pandemic is now over a month ago, and while the overall shape and pace of the recovery remains unknown, some of its characteristics are beginning to come into focus: slow, geographically disjointed, and prone to multiple reversals. What this is likely to mean for the future of M&A is both simple and complex. As with previous slowdowns, businesses with weak balance sheets or those for whom the future is clearly fraught will be more likely to be available for distressed or rapid sale; business units of larger groups with a similar outlook will be the subject of increased carve-out activity. Buyers will be those with the funding readily available to do deals, and the organisational ability to do them quickly. But as ever, the ability to do deals quickly has little if anything to do with the ability to be successful at M&A in the long-term.

Due to the sustained, continuous nature of the situation, this recovery will be unlike any other faced in modern times, but is according to some likely to resemble that following the Spanish Influenza outbreak*: In that instance, global economies didn’t recover until the early/mid 1920s, but with very significant differences in rate of recovery based on early and comprehensive adoption of social distancing measures and the resulting reduced local scale of the outbreak. At risk of diving into the debate on how different governments have responded to the first wave, investment in those countries/regions which have clearly handled the first wave relatively is well-supported by historical data.

So you’re a strong business with a healthy balance sheet and a clear strategic focus, primed to take advantage of the M&A opportunities now beginning to arise; you’re even being approached by groups who had spurned your advances last year. Great, but now comes the hard part:

  • How can you speed up your assessment of the target while retaining confidence that the business you’re buying is fundamentally sound, strategically-aligned despite a new economic and commercial landscape, and able to deliver up the benefits you estimate?
  • If part of a larger business, how can you help the target accelerate their carve-out to support a quicker deal, one that perhaps needs to be done yesterday to prevent seller insolvency?
  • How can you quickly bridge what seems to be an ever-increasing ‘valuation gap’ between your expectations and those of the seller?
  • And once acquired, how can you deliver deal benefits even faster than usual in a world in which some of the key drivers for successful integration – constant communications, visible leadership, teambuilding – are inhibited?
  • …hang on: it’s now clear that this ‘distressed acquisition integration’ is really a turnaround, something we’ve never really done before. How does that change our usual post-close plans, and our ability to deliver it?

*e.g. http://news.mit.edu/2020/pandemic-health-response-economic-recovery-0401

We’ve spent several weeks discussing these and other issues with our clients, listening to their concerns, and learning from their own practices as well as our own. While the challenges are slightly different, the overall ‘capability themes’ presented in the first post – things which we will all need to improve if we are to emerge better at M&A and integration – remain applicable. Here are a few of the practices that are emerging:

‘NEW’ CAPABILITYPREPARING FOR FUTURE OPPORTUNITIES
Building Trust & AlignmentBuild in additional time up-front and across deal and integration programmes to openly discuss/align teams on role, activities and ways of working; supplement with 1-1 check-ins regularly.
Establish regular meetings with the divestment owner pre-close so you can define joint requirements and work on separation issues together. This will ‘help them help you’ in separating the acquisition cleanly.
Addressing the Need for SpeedTriage your objectives and benefits early: Identify the ‘top three’ obvious drivers of value and assess your integration plans and risks related to these; leave the rest for later.
Offer to directly support the separation pre-close to support a rapid sale;
…or ‘go large’ on TSAs to delay significant separation activities (e.g. IT systems).
Taking More Risk (Responsibly)Assign senior practitioners in an advisory capacity to suggest areas of particular importance/focus vs . exhaustive comprehensive checklists.
Increase the use of incentive-based buyer remuneration (e.g. earn-outs) but ensure incentives are motivated towards change and integration goals.
Managing UncertaintyMake experienced-based assumptions around integration/restructuring (e.g. based on similar deals in the past) to avoid lengthy detailed analysis, planning and budgeting.
Increase formal post-close contingency (time, resources and budget) to accommodate the ‘minor’ unanticipated issues that arise
Develop outline deal/integration plans for multiple likely external scenarios; give someone accountability to monitor conditions and be ready to signal a course change if needed.
Resetting ExpectationsBe more transparent/collaborative in your valuation approach and assumptions with the seller to reach a mutually acceptable price.
Define benefit scenarios to communicate multiple ‘possible’ outcomes rather than a single ‘most likely’ case.
Be balanced in your communications related to deal objectives (e.g. announcement, Day 1); present the pain as well as the gain.

In the new world post-crisis, we believe successful businesses will have evolved to accommodate less synchronised economies, reduced travel, new technologies, more flexible supply chains, and greater use of alliances to achieve inorganic goals. We’ll explore how to plot a course and thrive in these conditions in our next post in the series.

As a specialist firm with a senior team and over 20 years of experience, BTD can provide the new thinking, advice, resources and tools to help M&A, integration and divestment teams navigate the new world. If you think we may be able to help, give us a call.