Mergers & Acquisitions (“M&A”) is a powerful tool that companies use to execute on their strategic imperatives.  Even in the best of economic times, the successful acquisition of a business, the integration of its operations, and the joint execution of a uniform strategy involve a great deal of risk and complexity.  Although the trend is improving with the growing expertise surrounding the practice, most M&A fails to deliver on its financial or strategic objectives.

The Decline

So, it’s not surprising that when the pandemic started to shut things down, the record pace of M&A which had been sustained over the last five years, stopped abruptly.  Survival, not strategic expansion nor consolidation strategies, rose to the forefront of company management teams’ agenda.  Most companies directed their leadership and top resources, which would normally have been deeply involved in the detailed elements of finding, executing and integrating companies, to focus on securing financial stability and put into action all the operational changes needed to survive.

Both the equity and debt markets dropped significantly during this early time in the crisis, which brought about a great deal of uncertainty to market values and valuation.  Only weeks before the market swoon, relative value benchmarks and the notion of a “fair market value” for a company were much more easily derived.  Given the drop in prices and the rising volatility in the markets, these typically dependable indicators of value became totally unreliable.

Finally, acquiring leadership teams realized that, if they themselves were faced with uncertainty and had to figure out their survivability and their future plans, the selling companies must be going through the same thing.  Almost everything that a buyer would have known or examined during due diligence became instantly obsolete or irrelevant.  In short, it became impossible for leadership teams to maintain the effort, attention, and accuracy necessary to complete M&A transactions.

Starting Up Again in Waves

Through contingency planning and aggressive survival tactics, many companies are successfully navigating the current crisis and are positioning themselves for potential future competitiveness, which allows them to re-dedicate more time and attention to considerations of the future.  Although the current pace of activity remains well below the record-setting levels of the last few years, the number of announced M&A transactions has started to climb steadily again.  With more transparency around fiscal and monetary policies and a clearer picture of “winners and losers” in the crisis and beyond, leadership teams have gravitated towards a more risk-taking posture around M&A.  Stability in the equity and debt markets has also helped to bolster confidence significantly in pricing and valuation.

The first wave of announcements of completed M&A relates to companies that decided to re-start the processes that they had previously discontinued because of the crisis.  The companies involved likely found it easy to re-engage around the new set of forecasts and estimates under which each is now operating to quickly re-confirm the strategic and financial viability of the acquisition or merger.   Another wave is making its way from idea generation to announcement—M&A involving “born in the pandemic” ideas.  These relate to ideas and strategies that have developed as companies think about the “new normal” and what capabilities and scale will be required to compete in that future.  They have likely concluded that it will take to more capabilities than they have today to compete and that they cannot build these out organically over a reasonable period of time.  We should, of course, expect to see additional M&A announcements from “fire sale” transactions—those where specific company circumstances lead to selling prices at very distressed levels.  While more opportunistic and risky in nature, these distressed transactions can lead to significant strategic value and require all the attention and skills, if not more, than M&A between two healthy companies.

Where Are We Headed

The sudden impact of the current crisis shocked leadership teams across all industries as well as the financial markets.  The actions necessary to develop and put in place survival strategies took away their ability to execute on existing or new M&A opportunities.  With the dust settling and survival strategies in place, leadership teams are looking ahead to the future.  This along with a more transparent and stable policy and market environment has re-invigorated the M&A market, which had been playing a major strategic role in shaping industries and driving innovation. It should continue to do so in a post-crisis business environment.

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