M&A and Integration in 2020 – Capitalising on Turbulent Times?

M&A and Integration in 2020 – Capitalising on Turbulent Times?

So, the big question is now becoming, “Will the worldwide economic disruption caused by Covid-19 impact your M&A plans for 2020?” The short, easy answer is probably ‘yes’, at least in terms of how you consider the deals you make. While some (e.g. Financial Times, 27 February) are touting that ‘Adviser M&A activity is on the rise’, others (e.g. Reuters, 28 February) are already proclaiming that ‘Coronavirus outbreak rains on dealmakers’ M&A parade’. Who to believe?

Back to basics: As the saying (should) go, “an acquisition is for life, not just for Christmas”. Rather than simply reacting to the market, all good deals (i.e. those that tend to deliver long-term benefit) are predicated on three fundamental questions:

  • Does the acquisition support your long-term strategy?
  • Is the price right?
  • Can you make it work post-close, and so deliver the anticipated benefits?

While the coronavirus outbreak may have a significant material impact on global economies in 2020, it is unlikely to impact two of the three above questions: The strategic rationale for the deal and your ability to make it work ‘beyond the deal’ will not change.

And herein lies the opportunity: just as during the Great Recession of 2007-9, markets and general economic conditions may make this an extremely fruitful opportunity to accelerate your M&A strategy, provided you’re in the right position to do so. Low interest rates, depressed valuations, and stressed acquisition targets can all help ‘make the price right’, but a low acquisition price does not – and should never – compensate for a weak strategic rationale or a high-risk integration. Unless you have somehow managed to negotiate a price significantly below the target’s true, current market value, you remain likely to pay a price indicative of the inherent ability to generate acceptable cashflow returns.

During any challenging economic environment – whatever the cause – some questions asked before formal pursuit of a target become even more important:

  1. Is your business ready to acquire and integrate? How is the capacity and scalability of your teams, processes and systems?
  2. Are your leaders prepared and supportive of your acquisition plans?
  3. Are you clear on the current position, strengths and weaknesses of the target? Are their own struggles (revenue cashflow, operations) and your ability to address them, understood and accepted? Will their position have changed significantly by the time any deal goes through and you take control?
  4. How will their prospects (and the competition) change once the storm has passed? Would they most likely lead, survive, or get left behind in the good times?

    …alongside key topics to discuss for any acquisition:

  5. Do you have sufficient understanding of the benefits to be achieved through the acquisition, and what it will take to do so?
  6. Are you clear (if only as an early hypothesis) on the likely areas and degree of integration appropriate to support benefits delivery and your long-term strategy?
  7. And one of my favourites in summary: In the long-term, would you be the best owner of this business? Could you achieve more with their assets and capabilities than other groups?