Winning M&A Strategies in times of COVID 19 and the challenges faced in making it happen.

By Darren Heathcote - CEO, HACH Private Capital

It may be a little too early to either understand or indeed confidently predict the full extent of the economic downturn in the light of the ongoing COVID 19 pandemic.

However, what is becoming abundantly clear is this emergence of new opportunities for organisations that are nimble enough to apply winning M&A strategies.

At HACH we believe we are quickly switching from a long-running seller’s market to one more favouring buyers, especially companies that have built a healthy balance sheet during the economic boom of the past ten years and therefore those in relatively strong capital positions.

Therefore, the key is don’t panic. Even though investors might appreciate divestitures in the short term, now is probably not the time to offload assets, potentially at fire-sale prices. We know from experience that in the long term, panic-selling does not create value and in any case, we can see from the data that the window for IPOs and other forms of divestiture has, at least for the foreseeable future, closed.

Instead let’s look at the opportunities and strategies that support them:

Declining valuations are creating opportunities for cashed up businesses to strategically and selectively pursue deals that create long-term value for shareholders. History demonstrates that smart, timely acquisitions, done during periods of significant weakening of economies creates considerable value for shareholders.

Experience shows that returns made by experienced, active acquirers from downturn transactions are as much as five times higher than those earned by occasional acquirers. But how do they achieve this?

The fundamental key strategy when acquiring under performing assets during weak economic times is the need to conduct a very focused well-structured and disciplined due diligence process (without being distracted by the current crisis), using prepared scenario planning in order to both react to a fast-changing environment and also rigorously integrate targets in readiness to jump-start value creation when the market recovers.

Examples of some of the considerations and associated challenges are:

    • Valuation – how do you value the impact of such things as potentially disrupted supply chains, unusual inventory levels or distorted accounts when looking at valuation? Cost of workplace sanitisation, idle or closed facilities, new tech infrastructure requirements for remote working, new employee training and adjusted customer outreach, marketing and sales channels can all play a part.

    • Pricing mechanism – material adverse change provisions are extremely important in the pricing mechanism. What should be the mechanism to agree on to adjust between initial term sheet pricing and final settlement? Do earn outs or other forms of contingent considerations make sense and will these pricing mechanisms potentially impede on decision making during this period?

    • Headroom analysis – understanding the target’s existing debt arrangement and the credit terms, their tax implications and how they may change and affect the integrated organisational cash flow is essential to help de-risk an acquisition.

    • Post-merger integration – is there a cultural fit and how will key talent be supported, developed and retained during transition? Most business mergers fail because of a lack of post-merger planning.

Look outside of your core business

and be prepared to reset your acquisition priorities. Whilst acquiring targets in your core industry during a downturn brings the opportunity to create additional value, many businesses can often benefit even more from non-core acquisitions. It’s clear that bold acquirers that utilise downturns to get ahead of the curve often come out stronger and therefore, a strong company should look to take advantage of the environment to execute its broader strategic acquisition agenda. By correctly positioning the business during the slower period, the opportunity is to exceed industry-average growth as the synergies kick in as the economy recovers and accelerates out of the recession.

Non-traditional M&A Activities. Consider de-risking your M&A strategy. Where your industry is being hit hard by the current crisis, consider other approached rather than outright M&A. Forming strategic alliances, for example, could be a way to resolve short-term supply chain issues.

How HACH can help - Our team is ready and prepared to assist you during these turbulent times to advise on strategy and help you target and acquire businesses that bring accretive value as markets normalise. Whether you need assistance developing a strategic agenda, rationalising business units/resources, or would like to develop a list of potential targets that fit your agenda, please feel free to reach out to our experienced team to discuss.

There will be buying opportunities soon and we’d be delighted to help you take advantage of these opportunities.

Please contact me:

Darren Heathcote

E: darren@hachprivate.com

Posted on 14 April 2020