With Brexit finally done, all indications were that 2020 would be a strong year for UK domestic and inward investment mergers and acquisitions (M&A) activity. The early signs that this would be the case were positive. Then everything changed. The unprecedented lockdown measures taken by the UK government and governments around the world in response to the COVID-19 pandemic have impacted deals in a number of ways. Some have aborted. Others have been “furloughed”, to use the new jargon. A good proportion of deals have stayed on course, but given the many challenges created by the lockdown, inevitably getting to the closing line is taking longer than usual. And finally, some deals are being restructured; for instance we have seen equity investments become convertible debt and a corporate joint venture transform into a contractual structure.
It is easy from a professional advisors’ perspective to focus on the deal process and forget that once the dust settles and a deal closes, that the work really starts for acquiring companies. An acquisition project often runs side by side with an integration planning process and especially with experienced acquirers, there is often an entire integration team ready to deploy within days of a deal closing. Successful business integration is challenging at the best of times. The key to success in Mergers and acquisitions is to integrate quickly and efficiently: to get your target company’s staff on board with the new owner and group, to identify and execute synergies and improvements and to bring, what can sometimes be, differing cultures together. Given the restrictions on movement as well as social distancing requirements this will be a challenge to any buyer, even in the “hot to acquire” ones, and more or less impossible for those based overseas who do not have the boots on the ground in the UK. It is this practical challenge of integration that in our view is dampening deal activity as much as the general concern about sustainability of businesses over an unknown lockdown, and potentially slow growth period thereafter.
Whilst deal activity has slowed, there are still sectors where activity is buoyant. This tends to be those in those sectors where income is of an annuity-type and linked to businesses and products which are seen as business critical or highly desirable at the moment: these tend to be logistics and those tech-type companies where software to enable remote working, for instance by means of communication systems or workforce management, is proving invaluable. The revenue is often driven by numbers of users (increasing) and by monthly or annual licence or subscription arrangements – so pretty much guaranteed in business critical operations. Not only can the workforce of such tech companies work remotely and effectively, but their products are quickly and easily supplied to customers.
The key for those business owners who wish to sell is to concentrate on managing their companies as best they can in the meantime so that they can emerge at the other end of the tunnel with an intact and fit for purpose business model, because if they were attractive pre COVID-19, they will remain so. For those considering an earlier exit, even if trading has been substantially impacted, there remains liquidity in the market with acquirers and funders still looking to invest in good opportunities. There are a number of ways that valuation gaps can be bridged to allow deals to happen. Earn out and preference share structures can be put in place to provide price uplift for sellers while at the same time giving necessary downside protection to buyers.
We have a dedicated page, Coronavirus (COVID-19) – Legal advice and guidance, which we are continually updating with information as and when new measures come through from the government and other bodies.