M&A - friend or foe in the new world?

Some businesses have really struggled during the Covid period. But a lot have prospered. Most have found themselves somewhere in between. Now, with so many challenges to manage, it’s not surprising that many leaders have their heads down, concentrating on making the most of their existing businesses. But are they going to miss out by not looking outwards at broader opportunities?

The last 18 months has given businesses an insight into their future, how they’ll be tested and what it will take to be successful. This should have led to a reconsideration of strategy, capabilities, expectations and vision. And a realisation of the need to move quickly to re-set and get ahead. M&A can provide a good and fast way to adapt and effect the required changes, but as in many other areas, leaders will need to think differently if they are to exploit the emerging opportunities.

For the right businesses, a sale in the current market can certainly still be a chance to realise significant value. And a well-planned sale to the right partner can help advance the realisation of strategy, avoiding years of toil, with the related risks and pressures. But a part sale of the non-core elements of the business can also help accelerate the chance for leaders to focus on the areas of strength. So, in this new world, it’s important to be open minded about what could suit your situation.

In overall terms, M&A activity has been accelerating and valuations have been strong. There are buyers in the marketplace with plenty of money to spend; they just might not be the ones you’d normally have in mind. There is a lot of investment capital available. And those trading businesses who have prospered and benefitted from lower costs recently, have strong balance sheets and cash reserves to perpetuate their growth. But only focused on the best business opportunities, of course.

Competition for the best deals and the ready availability of capital has kept valuations at a good level. This is good news for sellers, but the models used by acquirers have changed and this will create new challenges for those looking to realise value in the future. Scrutiny is now at a much higher level. Not just on the ability to grow and generate profits, but on being able to continually maximise opportunities, optimise returns and fend off challenges. Purpose, culture and employee commitment all now really matter. And leadership teams will be looked at even more closely – including how everything has been managed during the pandemic. These new measures now need to become an everyday currency for leaders and managers in building value into their businesses.

But those considering selling need to look beyond the price itself, because buyers have now tightened the terms underpinning their offers. The timing and conditionality of payments can quickly change a positive valuation into an unattractive deal. And careful thought needs to be given to future roles, remuneration and contractual restrictions as leaders’ views of their own future may differ significantly from those of their potential new owners.

However, things aren’t all stacked in favour of buyers. The game has changed there too. Businesses with surplus funds looking to grow, need to find the right opportunities to accelerate their strategy and enhance their value. And when there is tough competition for the deals, rather than demanding a good story from sellers, buyers will have to look at their own ambition, positioning and values to enhance their attractiveness as a destination for the discerning seller.

Smart leaders should be seeking good acquisition opportunities in areas that fit well with their business. But with so many fundamental market changes going on, it’s difficult for buyers to define future fit without being crystal clear on their own strategy. And then, when it comes to assessing specific targets, how should the recent Covid disruptions be assessed? Growth and profit records may have been distorted, customers and staff commitment challenged and leadership teams tested like never before. With all these changing dynamics it's much harder to identify the future winners - and losers. Many pre-Covid stars will only fade in the future and many well-led businesses will have discovered their magic during these challenging times. It will be a challenge for buyers to determine which is which.

And when it comes to valuations, these obviously need to work for both sides of any deal. But pricing is more complicated today than before Covid. As ever, it’s easy for enthusiastic, competitive buyers to drive prices up, but the question isn’t about the amount that’s paid, it’s about the value that the acquiror can create after the transaction. So there is even greater need to understand markets and anticipate future changes. But with a clear strategy, there will be good opportunities for value creation and leaders should not be put off considering M&A activity, even if they feel that prices and risks seem high.

Merger, has always been the element in M&A that most people have ignored, seeing it as just a cosmetic word used only to sell in an acquisition to sensitive stakeholders. But in the new world, where realism is more prevalent and egos much forgotten, authentic partnerships can be a powerful way forward for many businesses. The right partnerships and collaborations can improve quality, create new opportunities, fuel scale, drive efficiency and enhance results.

So, whatever the size and status of your business, you should certainly view M&A activity as a valid tool to help achieve your objectives. In this new world, with different principles and expectations, it’s likely that there will now be better and more rewarding deals and alliances to be put in place. Those of you who want to seize the new opportunities will need to commit to a rigorous process of planning, exploration and execution. But whether M&A becomes a friend or foe for your business will depend on the clarity of your strategy, the vision of your leadership and the effectiveness of your management.

First appeared in the Autumn edition of ILM Edge.