M&A practitioners, fund managers and CEOs are living a 2020 that is rich in experiences. Of course, we all hoped this to be the best year since the 2008 crisis.
In fact, it turns out that more than 50% of CEOs of Fortune 500 companies surveyed are of the view that economic activity will return to the pre-pandemic level only in Q1 2022. However, rather than project gloom that deal making has reached nowhere near expectations, let us focus on positive M&A experiences for this year:
- Entrepreneurs/founders/owners have learned to be braver. The same goes for buyers
The CEE abounds in examples of those who looked beyond their core businesses to create value, who "reinvented" themselves or who had the courage to take tough decisions. I am proud of one of our M&A clients, Taparo group, a leading Romanian furniture and textile products manufacturing group, which decided to capitalize on its technical textile expertise and launch mass production of medical protective equipment in order to offset the potential downturn in the furniture industry due to the pandemic. But this is just one example of many. At the other end of the rainbow, it is the bold dealmakers who will take the opportunity to earn high returns, to get ahead of the curve and to ultimately come out stronger.
- Personal relationships are being built
In difficult times, you must rely upon your trusted advisors and business partners, hence relationships are valuable assets. PE funds are taking the time to build trust and develop bridges. Deals are being made because, among others, the dealmakers have stayed close to entrepreneurs.
- Leadership and values are of more importance than ever
Businesses having good foundations and led by powerful leaders stand the best chances of being M&A champions. Entrepreneurs who have a solid business plan and focus will also find interesting deals.
- Slow is better than fast
Parties are modelling additional time into transactions and must plan for logistical challenges and other disruptions presented by the travel restrictions imposed by the pandemic (such as inability to meet in person for management presentations or to conduct site visits), unpredictability regarding performance, additional coronavirus-related due diligence, delayed regulatory filings and greater challenges with acquisition financing. But this allows parties to get to know each other better, to enhance overall cooperation and to develop synergies.
- Technological transformation must accelerate
The crisis has revealed the obvious conclusion that all organizations must become digital and that intangible assets are a critical element for realization of value. Luckily for us, the CEE boasts a number of innovative tech companies, which can serve either as targets or service providers to targets.
- Keeping employees productively employed constitutes a priority
Demonstrating flexibility while being efficient as regards manpower is at the core of present and future success. Those M&A targets which have considered this raise less fundamental concerns for acquirers.
- Dealing with vulnerabilities (rather than characterizing these as "crisis management") has considerably improved
Companies have learned to react swiftly to address their vulnerabilities better than ever before. Such will make a difference in future deal making and will be subject to the buyers' management assessment checklist. As a side effect, the CEE has become more attractive for those European companies now reconsidering relocation of their production facilities from distant countries to locations "closer to home".
- Indebtedness looks different in war than in peace times
Experiencing liquidity stress, with banks and business partners reluctant to offer additional assistance, can offer a good lesson for fiscal discipline. Cash management requires a medium-term plan with a solid anchor and a significant reserve for contingency in an uncertain world, and sellers seem to have begun coping with this new reality by creating appropriate liquidity buffers.
- Deals done during weak economic times create value for dealmakers and their shareholders
Despite a slowdown, we continue to sign and close transactions in COVID-19 times. Focused due diligence processes, scenario planning for a fast-changing environment and rigorously integrating targets has helped the M&A market to jump-start value creation.
- Agreements are seen through different lenses
Generally, contractual arrangements are looked at with different eyes in 2020. Many businesses are not currently operating consistent with past practices and there is a greater likelihood that parties may be in breach of material contracts. We are nonetheless facing a greater willingness to renegotiate provisions in M&A transactions, customer or supplier contracts, to discuss EBITDAC (EBITDA before Corona) and to accept that regulatory filings are moving slower. The prevailing sentiment among both buyers and sellers seems to be "we are in this together".
By Ileana Glodeanu, Partner, Wolf Theiss Romania