Although transactional volumes dropped, particularly in the first lockdown; it is striking how quickly M&A strategies and exit aspirations have reasserted themselves and how determinedly vendors and acquirers have set about implementing their plans or taking advantage of new opportunities, notwithstanding the continued and material uncertainty surrounding them.
Now we are hopefully on the road out of the pandemic, at HMT we think it useful to reflect on what permanent changes might have been wrought on the M&A process as a result of our lockdown experiences.
- Vendors are better prepared
Transactions, be that private equity or trade deals, have had to take place entirely, or almost entirely, virtually. Leading an entirely virtual deal is surprisingly straightforward provided the business is fully prepared for the process and the information that will be required is available, up to date and well structured. Having a clear understanding of what will be asked for and looked at in a process is essential for a smooth process regardless of lockdown, but when a deal is being run virtually, the efficiency and adequacy of data provision comes into very sharp focus. With more considered preparation a prerequisite of lockdown deal success, vendors have found that a largely virtual deal can be faster and more efficient than a face to face one. It is to be hoped that this learning will not be lost.
- Technology tools drive deal efficiency
Deals in lockdown have been conducted almost exclusively via video calls. The “set-piece” all parties meetings have tended to be replaced by more frequent, smaller, better agenda’ d meetings on a more regular basis. Getting the right people in a “room” to address a specific point or issue is easier and quicker than it has ever been, location is irrelevant and, as a result, the process itself is smoother, quicker and less disruptive. One notable side-effect of lockdown and electronic signatures is that lawyers no longer need to print off version after version of documents and, with hindsight, it is difficult to understand why these tools weren’t being used before anyway. It is to be hoped that having discovered them, 72 hour completion meetings will be a thing of the past.
Successful transactions are typically the product of a reasonable relationship between buyer and seller. No deal goes 100% smoothly; uncomfortable feedback and difficult debates are a standard feature of the negotiation process. Back in March 2020 this felt like the most significant barrier to closing transactions in lockdown, particularly with private equity who predicate their investments on their trust in management teams. But it has proved possible for vendors and acquirers to build on, or even to initiate, strong working relationships entirely over Zoom, Teams or WebEx (sometimes all three!). Whilst there will no doubt be a return to relationship building “over a beer”, it has been fascinating to see just how effectively virtual relationships can be built and sustained and given the efficiency gains, it is conceivable that a blended approach will be the way of the future.
Finally it is self-evident that some sectors have been, and will continue to be, more attractive than others to the market until restrictions are lifted and the medium-term impact of COVID-19 on those businesses which have been worst affected is clearer. Software and IT businesses, used to working remotely and in greater demand because of the pandemic are attractive targets, as are businesses which address shifting societal demands such as social care. These sectors have seen some spectacular multiples due to a scarcity of assets actively on the market. By the same token hospitality and travel businesses (for example) would not be an obvious focus for investors now, although in every sector there will be winners/paradigm shifting businesses that will thrive on the other side. With corporates seeking to take advantage (as ever) of market crises to consolidate at bargain prices, even in the hardest hit sectors there will be successful deals on sensible terms.
Far from preventing deal activity, the pandemic and repeated lockdowns have innovated the core transaction process to generate efficiency gains and to break down some longstanding traditions. They have served to remove the barriers of time and location, democratise the process and reward focused preparation. It is difficult to believe that we would go back to manual signatures, tables full of piles of paper and days of meetings; though it would be lovely to have a completion dinner again!