This year has represented the most pronounced disruption to the working environment of my 20-year career in M&A.
Six months on from the start of lockdown I thought I would share my top 10 observations:
1. Covid’s impact on businesses has been like a tornado ripping through a city, some streets have been destroyed, some have had a tree or two knocked down and some are untouched (to borrow someone else’s simile). This is directly reflected in M&A – for those businesses untouched, or relatively untouched, M&A continues apace.
2. Broad brush, these businesses tend to be either ‘digital’ or specialist: digital transformation; digital marketing; tech consulting; martech, software implementation; performance marketing; data and analytics; ROI; measurement; healthcare sector; technology sector, etc.
3. The shape of M&A has changed. There has been a shift away from large ‘platform’ deals representing greater outlay and therefore risk, to smaller, strategic ‘bolt-on’ deals which add new capabilities / sectors / geographies. We have seen some bounce on larger deals as things stabilise, but the bolt-on market remains very strong – in part driven by my observation #5.
4. Traditional acquirers – particularly some of the listed groups, with a lot of exposure to the ‘old world’ – have stopped buying. But everyone else is still online. Leaders have learnt from 2008 that you shouldn’t stop strategic activity, and every crisis is also an opportunity.
5. In fact, there are a lot of first-time buyers in the market. Bold leaders of independent businesses are looking to initiate buy-side M&A processes to steal a march on the competition and come out fitter and stronger on the other side.
6. The biggest hurdle for any buyer is finding a willing seller, but here there is movement. Even owners of robust businesses are wondering if now is a good time to de-risk and find a bigger partner to sit alongside. This material change in mindset is creating opportunity for our clients.
7. There are a lot of buyers looking at M&A opportunistically, trying to buy struggling but fundamentally sound businesses. This is not yet happening at scale, but we predict it will accelerate as governments start to withdraw their support and lower cash collection from quieter summer months begins to bite.
8. Evaluating P&Ls has become much harder. We are seeing ‘Covid P&Ls’: strong EBITDA for 2020 driven by cost savings in T&E / Premises / Marketing costs, combined with government support which outweigh the impact on revenues. It requires smarter thinking to understand underlying performance.
9. M&A processes are becoming faster. Buyer engagement and DD is being conducted over video conference, easing diary log-jam and the requirement to wait for leaders to be in the same city – I’ll leave it to my partner Tristan to elaborate here.
10. However, M&A is not the only route to value realisation. Many businesses are looking at Employee Ownership Trusts. With the risk impending of tax rises, the ability to realise capital value and stimulate regime change without needing to find an acquirer is becoming an appealing route for many of our clients.
Joe Hine is a partner at SI Partners advising technology, creative and consulting clients on growth and M&A.