Even though in the past 18 months everything seems to have changed, the fundamentals of successful M&As have not.
In the world of M&A, the COVID pandemic had two distinct effects on deal volume in the first half of 2020, when M&A activity ground to a relative standstill, and in the surge that started in Q4 of 2020. In fact, deal volume in April 2020 was 80% lower than in December 2019, and many of the deals were borne out of necessity to help companies in sectors hit hardest by the lockdowns (such as entertainment, travel and hospitality) stay in operation.
In contrast, according to data from Morgan Stanley, during Q4 2020, there were a record 1,250 M&A deals globally, totaling more than $1 trillion. The waning of the pandemic, and the beginning of economic recovery in many developed countries has helped M&A activity bounce back, but a convergence of economic and business drivers have pushed M&A to record highs.
Historic low interest rates have boosted buy-side economics, and the need by many companies to pivot in response to COVID, has made M&A an attractive and fast path to acquiring new skills and tools. Additionally, while there was consolidation resulting from last year’s downturn, some sectors saw significant growth during the pandemic, incentivizing those who accumulated significant cash to find viable investment opportunities. Finally, the popularity of alternative deals such as partnerships and minority stakes has enticed new players to enter the fray, and mitigated the risk for some weary investors.
Looking ahead to a more normalized economic environment, we expect a number of M&A trends to persist. These include a continuation of interest in alternative deal structures; an increase in what can be called “special sauce” type deals such as when a company buys a skill, or a way of doing business that the acquirer seeks to preserve post-transaction; and the dominance of “growth” deals as opposed to “synergy” deals.
Notwithstanding the robust M&A activity, it is still unclear when most employees will return to offices or other in-person activities. Yet, as more deals continue to materialize, companies will undoubtedly be tempted to proceed “full speed ahead” and attempt to integrate remotely. As past decades of M&A experience and research have shown, successful post-deal integration is critical to realizing deal value and returns. Given how challenging integrations are under the most favorable conditions, and how difficult it is to successfully execute an integration, the idea of adding the remote element to it and expecting no hits to desired outcomes is more “wishful thinking” than it is realistic.
For the vast majority of cases, remote integration will prove not to be a good idea, and taking the leap anyway heightens the already substantial risk of deal failure. So, the fact that it can be done, does not mean it should be.
The more things change, the more they stay the same.
The COVID crisis has imposed major limitations on how businesses operate and forced them to adapt to an entirely new working paradigm. Nonetheless, the pandemic has not changed the fundamentals of M&A that have persisted through numerous market and economic cycles. The fact remains that 70-80% of deals fail to deliver the desired shareholder results either due to poor due diligence, poor integrations or a combination of both.
One of the biggest shortcomings of many due diligence processes is the lack of focus on – or underestimation of – the cultural fit between the acquirer and the entity being acquired. Effectively navigating cultural challenges is a massive driver of the ultimate success of a deal. But often, the financiers conducting due diligence either dismiss culture as a “soft issue,” or unrealistically underestimate cultural gaps. This, coupled with poor – or sometimes lack of – communication, creates a vicious cycle that leads to confusion, distrust among stakeholders, stress, and ultimately, low productivity and loss of critical talent.
Integrations can be extraordinarily complex from an operational perspective, yet the deal making stage almost never includes the actual operators of either business and decision-makers are often so focused on getting the deal done that – like the under-emphasis on culture – operational challenges are glossed over and integration planning doesn’t even start until after the deal is closed and announced, leaving all the heavy lifting of uncovering and solving operational challenges to the integration process.
Once formal integration begins, there is almost always a honeymoon period when both parties are genuinely excited and want to make the union work. However, the “real” progress of integrations happens once this phase is over, as more difficult issues are uncovered and start to be addressed. A sound integration approach helps compress the time between the “honeymoon” and the “getting-real” stages.