by Adam Hartstein

This article was written by Point B’s Dustin Hindman, Adam Hartstein, Dan Avery and guest authors Gregg Spratto and Kristen Brooks and was originally published in M&A Magazine

Understanding short- and long-term impacts is critical to successful M&A execution

The uncertainty caused by the COVID-19 global pandemic reduced merger and acquisitions (M&A) deal activity by nearly 50% for the first half of 2020, shedding nearly $1 trillion in transaction values, according to Bloomberg Law.  Transaction volume and the number of deals fell to its lowest point since 2004. As the business world began to settle into a new normal during the second half of 2020, private equity firms and corporate development teams started to actively deploy their $1.5+ trillion in idle cash, according to CNBC. According to Bain & Company’s “Global M&A Report 2021,” in the end, more than 28,500 deals were signed in 2020, with some sectors and geographies returning to pre-pandemic levels, reports Bloomberg Law.

This return to near normal deal activity occurred during a time when most of the workforce was operating in what The Atlantic’s Derek Thompson describes as the “nowhere-everywhere future of work” mode. With the steady increase in the adoption of digital collaboration tools, M&A in the post-pandemic world will continue to involve a significant remote work component with some strategic in-person activities. Given that M&A value realization and cultural integration have always been challenging to achieve, how should companies successfully navigate M&A execution in this new work environment?

COVID impacts present real challenges to evaluating the true opportunity of the transaction.  In M&A, the number of unknowns is always high, and the current environment has taken this uncertainty to the next level. As we look at companies’ financial stability, the Quality of Earnings analysis will surface anomalies in the most recent financial periods. In the current environment, your estimates of future financial performance are going to have new risks and assumptions that you will need to get comfortable with in order to proceed with the deal. In order to do so, it will be necessary to review key information at a granular level – more so than you may have done in the past, for example:

  • Expect to evaluate customers at an individual level to assess the true impact from the global pandemic.

  • Ask questions to establish an accurate prediction of 2021+ revenue targets and potential synergies.

  • Reset your expectations to prepare for a certain level of discomfort with the outcomes of your financial analysis.

  • Mitigate these risks through deal terms or by seeking acquisition targets with business models you understand since you will inherently know which questions to ask to get to the heart of the opportunity’s value and core risks.

Collectively, these actions should further reveal the company’s strengths and address fundamental questions such as:

  • Was the target’s core business resilient to this severe market impact?
  • Was the management team equipped to pivot and effectively lead the company through the pandemic, or did they make this historically challenging situation worse?
  • Were the employees of the company equipped to adjust to the new conditions and succeed?

As a result of the pandemic, we have seen severe impacts to some industries. However, in general, the pandemic did not turn well-run businesses bad or vice versa.

M&A execution across the deal lifecycle has undergone a lasting shift towards virtual.  The decline of large kick-off meetings, week-long workshops and frequent on-site visits does not mean that your M&A playbooks are obsolete. In fact, the playbooks and methodologies that you previously developed remain the correct anchor point in this new work environment. However, each step in the M&A process must be slightly altered with respect to “how” you perform and complete the step. For example, before the pandemic we would have aligned calendars, organized travel and brought everyone to a central location for a kickoff. This type of event can take weeks to coordinate and typically occurs at the start of each deal phase in order to align key functions, workstreams, goals and activities. With all parties remote, we have the advantage of quickly scheduling virtual, cameras-on sessions. We limit the duration to minimize Zoom fatigue and follow up these kick-offs with a series of well planned and executed virtual workshops that take advantage of the latest digital tools. Managed well, the elapsed time for completion and quality of engagement can remain the same or improve as you shift away from big events with long-lead times to sequentially-planned and well-executed, virtual working sessions.  

It’s important to validate and proactively manage lead times to avoid unexpected delays. Executive steering committees and integration management offices (IMOs) remain core to the operating and governance structure underpinning your M&A deal cycle. The primary objectives of these structures are to ensure deal specific objectives are aligned to strategy, drive executive decisions and address new risks. In the current state, it is necessary to plan further ahead and provide leaders with ample time to review materials asynchronously to remain an effective and efficient team. The same approach applies for third-party partners who have the potential to present resource constraints due to demand as deal volumes increase. Take the time to assess the situation by contacting your trusted network of third-party providers (brokers, consultants, insurance providers, etc.) and inquire about the lead times to obtain their services to ensure they stay ahead of your needs. Finally, be proactive with regulatory bodies to navigate their current processing times and keep each phase of the deal cycle on track.

Culture evaluation and alignment are more challenging. People are at the core of any deal. Aligning cultures and establishing trust across teams has always been a challenge and the virtual aspect of M&A has made this even more so. The integration effort must include a strong yet agile change management plan that ensures key talent is retained, operational capacity is maintained, and the acquired team members are convinced that amidst the uncertainty, the joint company is a stronger place and somewhere they want to stay. Traditionally, discussions to get to know one another and assess cultures occur outside of structured presentations and meetings over more informal lunches and dinners. The need to “break bread” has continued to be essential and is now achieved through a mix of one-to-one conversations and discovery sessions that are framed as educational. Making the extra effort to connect on a personal level, even virtually, goes a long way to reducing stress levels for the acquired team, merging company cultures and increasing the overall probability of success.

It has been a challenging time to conduct M&A given the new external factors presented by the pandemic. However, the shift towards a more virtual process can be positive as long as we continue to anchor our efforts to the fundamentals of our M&A playbooks. Post-pandemic, we expect to continue to execute aspects of our hybrid approach incorporating what we have learned. As we look back at the past nine months, we feel strongly that the business climate and new ways of working are encouraging signs about the future of M&A in 2021 and beyond.