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On the flipside

What does the M&A market look like in a post-Coronavirus world?

Somewhat understandably, the mergers and acquisitions landscape has gone a bit quiet in the last six months. With the global impact of the COVID-19 pandemic uppermost in people’s minds, most of the transactional activity has been reined-in, save for a few in-flight projects and investments in businesses whose activities have been less severely curtailed by the economic and social downturn.

With much of the world, and the UK certainly, now starting to look cautiously to the future, things are beginning to pick up once more. That in mind, now seemed like a good time to think about what the M&A market is going to look like as we start on the road to recovery.

Hardly a day has gone by in the last few months when the devastating socio-economic impacts of the pandemic have not been brought into sharp focus with news of job cuts, scaling back of business activities, site closures, or business failures. Unfortunately, the news only tells a part of the story; being a household name, or one of the biggest and best-known businesses in the world has provided little protection to British Airways, Rolls Royce, John Lewis, Virgin, and many others. But, for each of those big names there are the hundreds of smaller businesses who have been equally hard-hit, or moreso.

For those businesses, job losses or the closure of some sites may be the least of their concerns, with the real threat of the whole business failing preying on the minds of their owners, directors, or shareholders.

Make no mistake, this is bad news for many; but at the same time it creates opportunities for the well-prepared investor with a keen eye on the future and willingness to take a risk. For many businesses, now is the time when the existing board should be taking a new look at strategy and activities, and as a result I expect we will see a sharp increase in the number of MBO and MBI transactions, with fresh eyes or new blood needed to facilitate the innovation that can prove saviour to an organisation. Funding is available in the marketplace to support these activities, albeit with strings attached; but for the management team looking to take over their business or the investors with skill-sets that are lacking in the incumbent team, now is a great time to open a negotiating position.

Larger deals also seem to be picking up, with discussions that were put on-hold during the pandemic’s early stages now restarting. The delays will come as a double-edged sword, though; on the sell-side, business value may have decreased, perhaps significantly, after weathering the storm, with smaller revenues, poorer cash positions, lower headcounts and a less-positive medium-term outlook. For the buyers, this means their money goes further and there are potentially much higher returns to be had where the acquisition target operates in a market which may bounce back more rapidly and strongly. These markets are more attractive than, for example, high-street retail – a sector in which only the bravest investors are likely to take a chance on consumers going back to bricks-and-mortar from a world in which doorstep deliveries and e-commerce have seen huge growth.

New deals are starting to come through as well, with the owners of businesses which have bucked the trend and seen growth through the pandemic looking to capitalise on the opportunity to cash out and move on to the next challenge. Many of these businesses operate in the technology, online and service industries, and a good proportion of these were well-backed by outside investors and private equity; shareholders and owners who will look again to take advantage of the post-Coronavirus conditions to maximise their return.

Some investment firms have also taken a hit during the crisis, with the value of invested businesses taking a sharp decline in many markets. Obviously, this hits them hard, but restructuring and innovation, and deals associated with opening new markets or diversification into new products or services, are likely to be on the cards; although funding for undertaking them may be more carefully considered than in the pre-COVID-19 days.

Overall, the picture doesn’t look awful. There are still many, many tragic cases of businesses failing or scaling back, and these must not be forgotten. The world will never be the same again, but, for the fortunate, the brave, or the innovative, now is a good time to look forward and build the strong businesses of the future. That’s something we can all get behind.

Jisc | Data Matters

26 January 2021

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