Uncharted Territory – Navigating the New M&A Landscape
Covid-19 has propelled mankind into uncharted territory. As we collectively grapple with this unexpected catastrophe on a humanitarian level, the global M&A market is also navigating unprecedented challenges.
Today, the world looks dramatically different to just six months ago. Our general perspectives on life – both personally and professionally – have been turned upside down. Throw into the mix the intensifying trade war between China and the US, a potential decoupling that continues to develop, and the future is looking more and more uncertain.
Following the emergence of Covid-19, countries progressively moved into various stages of lockdown, volatility increased to levels unprecedented in recent times, and M&A activity momentarily ground to a halt. The outbreak has prompted governments around the world to impose widespread measures that have had a broad impact on business activity, and caused stock markets to plunge as investors try to factor in the economic impact, only to recover in an electrifying yet counterintuitive manner. In this context, there are several cardinal issues hampering M&A deal making activity today.
One, there is enormous uncertainty in the predictability of future earnings on which buyers and sellers will consummate a transaction. In this environment, many management teams are struggling – post-Covid – to forecast a reliable set of projections. Additionally, the variance around those projections is large, which leads to a wide range of outcomes and thus, more debate between the transacting parties
Two, public markets and related valuations are skyrocketing given the liquidity and central bank stimuli being pumped into the system. Currently, public markets are essentially pricing in rapid future recovery. Chinese stock markets gained more than 10% in the first 5 days of July due to policy measures and economic recovery. But in the absence of a correction in valuations, there is a dichotomy between the buyer and seller’s expectations on transaction multiples. While private equity clients have money to invest, many are presently focused on managing/protecting their portfolio companies as a first priority. As Private Equity players begin to deploy their accumulated capital, deals will be done, and asset prices will be chased up.
Special situations capital has become the ‘topic du jour’, as in these kinds of crises, the companies that need to raise capital often don’t have access to the public markets. Many special situation funds have used the temporary crash to rapidly deploy capital in stressed public and private situations, and many continue to hunt distressed situations, especially in sectors such as Aviation or Hospitality. Thus, traditional M&A has taken a backseat to special sits solutions in the short run.
Three, in many countries, doing physical due diligence, is just not possible as a result of the social distancing measures in place. Face-to-face negotiations have been reduced, if not non-existent. New technology, like video conferencing and VR, has alleviated these problems to a certain degree, but for deals where substantial due diligence has yet to be consummated, lack of physical due diligence is a hurdle.
Four, regulatory scrutiny too has been stepped up by governments around the world as they seek to protect national assets from being acquired by overseas buyers. Geopolitical tensions are at an all-time high.
Finally, you have the underlying stakeholders’ confidence for a transaction. Covid-19 has created enormous uncertainty. Pulling the trigger to buy or sell an asset has become so much harder, that people can, and have, chosen to defer.
Put all these factors into a mix and it creates uncharted territory for M&A dealmakers.
So, what is the prudent to do now? More than ever, it is imperative that board members and CEOs believe their deals are being done for the right reasons. Does the fundamental logic for the transaction still stand? Are the projections still relevant? Does the current environment impact both the short and long-term outlook? Will synergies still materialize? How big an impact does current volatility have on valuation multiples?
Sectors where you have a heavy reliance in Asia on supply chains will be tested. Take auto parts for example. Management must decide, does my operating model align with my supply chain solution? The new context of wages, vendor relationships, intermediary goods – are these suited for what the new world is going to look like? The list goes on. Conversely, certain sectors like Aviation are ripe for restructuring activity. Sectors like infrastructure that have high degree of contracted revenues and predictability continue to attract deal making activity and Natixis with its Boutiques in APAC is leading the charge on this front, managing several key sell-side and buyside mandates.
Looking ahead, while Asia-Europe and Asia-US activity might be dampened right now, there is a lot of intra-Asia activity taking place, and this will continue. Cross border transactions into the US, especially in the context of Chinese bidders/buyers, are without question going to be muted. Eventually, as people settle down among the uncertainty in the market, we’ll begin to see different types of products. Indeed, those who emerge stronger from the crisis are likely to be more assertive buyers looking to take advantage of opportunistic acquisitions while executing on long-term programmatic acquisitions.