Is the Pandemic Really an Opportunity for Cut-Price Mergers and Acquisitions?
Is the Pandemic Really an Opportunity for Cut-Price Mergers and Acquisitions?
It happens in every economic downturn. That drumbeat starting to rise from corporate Mergers and Acquisitions departments, and advisory firms:
“Now is a great time to buy commercial assets on the cheap”.
Fundamentally sound companies that are in trouble only because of the downturn.
In this article Robert Kemp, Training Programme Director of The Merger Training Institute, and tutor on our Core Mergers and Acquisitions Skills training course, explores some of the issues around opportunistic acquisitions of distressed companies, and when it might be the right move to make.
Does the target really fit?
The first question must always be “What are our real motivations for doing this M&A deal?” It needs to be more than:
- This is a windfall opportunity to grab market share.
- We are paying far less than pre-pandemic levels.
- At this price we must be able to add value.
In our Merger & Acquisition training courses we teach a structured approach to the acquisition process. Even for an opportunistic purchase it is important to work through each stage of the process.
First, is the distressed opportunity really a strategic fit? A good start is to ask, “Would we have bought this company pre-downturn?” Is it really in the territories, market segments, lines that fit our strategic direction?
Any new division will place a demand on internal resources – from basic oversight, to shared services and even management intervention. There will be future needs for investment and working capital. Capital that might be better invested in strategic priorities.
Do not skimp on the due diligence
Just because the asset is cheap does not mean you should skimp on due diligence. All aspects of due diligence, not just the financial and legal stuff. Try asking some of the key questions we recommend in our Mergers and Acquisitions Due Diligence training course.
- Is this really an attractive territory or market segment?
- Was the target gaining market share pre-downturn?
- Has talent been lost as the company struggles?
- Are the operations and assets up to scratch?
- Can we accurately assess the synergies and integration costs?
- Have customer and vendor relationships been disturbed by an insolvency process?
Again, “Would we have bought this if it was not so cheap?”
Think about the opportunity cost?
Even in a downturn distress purchases are rarely resuscitated by the addition of liquidity alone. There is always a significant element of turnaround. Turnaround requires investment of resources, especially management time. Resources and management time come at a cost. Not just the dollars spent, but also the opportunity cost. The better projects deferred or abandoned in your existing business as you work to turn around a weaker investment.
Insolvency process or proprietary approach?
The opportunity to purchase a distressed company will typically come to you in one of two ways:
- As part of a formal insolvency process supervised by a court.
- As a proprietary approach from or to the distressed company.
The obvious advantage to the formal insolvency is the ability to scrub off historic liabilities and buy “clean” assets. The downside can be time pressure. Do not fall into the time pressure trap. Insist on the time you need to complete the necessary due diligence. If this means missing the deal, so be it. There are enough opportunities to find trouble without paying for it. No matter how cheap to buy, trouble is still trouble!
From a commercial and operational perspective, the proprietary approach has many advantages. In our M&A training courses we promote the advantages of direct contact with sellers and managers that comes with a less formal deal process. Not only sufficient time for due diligence, but also time to invest in building relationships and shared post-deal expectations.
The downside of a direct asset purchase after a proprietary approach is a reduced ability to leave behind legacy liabilities. A share sale for, for reasons we explore in our Core Mergers and Acquisitions Skills training course, should rarely be contemplated in these circumstances. In many jurisdictions there are processes available to approach the court with an already formulated deal for presentation to creditors. This process will provide some protection from historic liabilities, but this is likely to be less clear cut than a full insolvency.
Do not overlook the post-merger integration challenges
Even in the good times many deals fail to achieve their potential because of poor post-merger integration. Dips in morale, cultural differences and leadership changes are challenging issues when you buy a growing, dynamic company. Imagine how much greater these challenges are when you buy a company that has struggled for months – dispirited management, anxious employees, nervous customers, and suppliers.
In our Successful Post-Merger Integration training course, we explore in depth the importance of visible leadership, clear communication, and a focus on establishing a healthy combined culture if integration targets are to be met. It would be easy to overlook this aspect when buying a distressed company. The initial attitude of your own employees is often “We’ve bought a failing company, and now we are going to show them how a successful company works?” I never fail to be amazed how arrogant middle and junior managers can be when interacting with their new colleagues. It is essential that senior management and integration leads get a grip on this attitude from the start.
At its heart cultural friction is about disrespect. A failure to respect the culture, ways of working and achievements of the target company. A good way to address this at the start is an open-minded benchmarking of the target’s processes and operations against your own. Who knows, they may be better at some things. It would be shame to throw that away. Especially as you paid for it, no matter how low the price.
So, Should We, or Shouldn’t We?
Absolutely yes, if the strategic fit is good, the target is well positioned in its market, and has good quality people and assets.
Absolutely no, if there is any chance the investment will become a lemon that drains management time for years. No matter how little you paid for the acquisition stakeholders will expect you to hit the synergies and financial projections in the acquisition plan. You will find the low initial purchase price is soon forgotten, and all the focus is on hitting the promised numbers.
So, how to sum all this up? It is perfectly possible to buy attractive assets at favourable prices during a downturn. Many companies use downturns to acquire strong divisions that drive future growth at attractive prices. Counterintuitively they do this by ignoring the low price and focusing instead on the target’s quality and strategic fit. The same qualities they would look for in a fully priced deal.
About The Merger Training Institute
We provide practical, in-career mergers and acquisitions training for boards, executives and professionals in global corporations.
Our short, intense M&A courses are designed for executives needing to understand best M&A practice or adding new M&A responsibilities to their existing roles.
The courses are taught by tutors with hands-on M&A experience gained as part of corporate management teams. As well as being academically rigorous they are rich with case studies and real-world examples based on our tutor’s practical mergers and acquisitions experience.
Our course participants come from a wide range of industries and roles including general management, business development, strategy, marketing, finance, human resources, operations and legal.
Our Mergers and Acquisitions Training Courses
Core Mergers and Acquisitions Skills Training Course
The Core Mergers and Acquisitions Skills programme (M&A training course) is a three- day programme that teaches all the commercial and technical skills you will need to confidently lead or support a successful M&A transaction.
Our expert tutors guide you through the M&A process from strategy and deal origination to valuation, due diligence, deal structuring, contract negotiation and post-merger integration.
M&A Due Diligence Training Course
The M&A Due Diligence Training Course is a two-day programme that offering a solid grounding in the techniques used by some of the world’s most successful companies to assess risks, evaluate synergies and confirm the strategic fit of an M&A target. The course is designed specifically for executives involved in corporate M&A.
Successful Post-Merger Integration Training Course
The Successful Post-Merger Integration Training Course is a two-day programme that provides a solid grounding in the post-merger integration techniques used by some of the world’s most successful companies to deliver value from their M&A transactions.
Across the two days of the course you move from the key decisions made in the pre-deal phase, through the critical first 100 days and on to full synergy delivery. The course covers the post-merger integration issues most likely to arise in each business function and the most important business processes.
Advanced Business Valuation Training Course
The Advanced Business Valuation training course is a two-day expert level business valuation training course that teaches participants how to prepare robust business valuations in the context of a corporate M&A transaction.
Our expert tutors move you past the stage of plugging numbers into a standard spreadsheet and help you explore how risk, synergies and the quality of the target company might impact its value.