Louis Lehot||Dealing during the Crisis: What to expect for M&A and How to get deals done in the Second Half of 2020
By Louis Lehot, the founder of L2 Counsel, P.C.
M&A deals during Q2 2020 mirrored the trajectory of Acapulco cliff divers plummeting to the sea. Global M&A by value fell to $318.6B in Q2 2020, a low not seen in 17 years. Mergers and acquisitions can be difficult in any economic environment, but they are even more challenging during a pandemic. Given the unprecedented circumstances created by waves of economic shutdowns, reopenings and re-confinements, proscribed travel and verboten face-to-face meetings, following are prognostications for M&A for the second half of 2020 (H2) and tools and recommended strategies for getting deals done.
First off, will H2 2020 be a time to pause acquisitions or pursue them? In H1 2020, we saw contrasting examples. Boeing abandoned a $4 billion deal to acquire 80 percent of Embraer’s commercial jet business and a 49 percent stake in a joint venture to produce a new military cargo jet, citing the deteriorated outlook for air travel and decreased demand for jets. Juxtaposed against negative sentiment in the aerospace, apparel and travel industries, we saw bullish sentiment from big tech, consumer products and financial buyers Google Cloud, Nestle, and BlackRock.
To understand how companies are navigating M&A during the pandemic, Harvard Business Review published an M&A Leadership Council survey asking 50 C-level executives and senior corporate development leaders about M&A deals in process at the time the crisis hit and anticipated 2020 deal volume.
More than half the respondents (51 percent) indicated a temporary pause of deal activity to examine the market recovery timeline. In contrast, 12 percent said they were expediting late-stage deals to a quick transaction closing. Another 12 percent said they plan to continue to deal-closing pursuant to the successful renegotiation of valuation or terms. The bold quartile isn’t stopping.
When forecasting deal volume for H2 2020, 26 percent of those surveyed anticipated a reduction, and most buyers (51 percent) anticipate remaining on hold until economic recovery becomes clear. Counterintuitively, 23 percent of respondents reported either no impact to 2020 forecast deal volume or said they intended to accelerate deal volume.
For the daring cohort, there are some key, clear actions on the table. If you are a skilled buyer with a strong balance sheet and buoyant stock operating in a growth sector, you can seek out strategic revenue growth deals similar to your prior core acquisitions; target distressed businesses selling off divisions or assets; or acquire new, adjacent technologies or solutions to diversify future revenue.
On the other hand, if you are positioned to be a seller, you may, like Penelope in the Odyssey, have multiple suitors. Your task will be to bridge the valuation gap. Your valuation, deal structure, growth incentives and talent retention, will need to be creative, even compelling, while still simple enough to win over a bidder convincingly.
For some businesses more severely impacted by COVID, sellers may choose to wait until a new valuation consensus emerges or until their profitability recovers. As 2020 progresses, we expect to see a significant increase in distressed M&A deals, leading to acquisitions of technology and teams. Often called “acqui-hires,” these are asset acquisitions where the buyer acquires the target’s intellectual property and recruits its engineers, leaving the corporate shell and its liabilities behind. The buyer in essence excludes any non-desired assets and liabilities, leaving the target the task of winding down.
In nearly all of these scenarios, deals will have to be executed by distributed parties in disparate locations. Building trust and confidence in a process, in a team, and in the ability to achieve a goal — sometimes without ever meeting in person — is a daunting challenge — but meet it we must.
COVID-19 has had a profound effect on our personal and professional lives in every sense. At the outset of the pandemic, we thought about deals already signed and whether they would still close. We considered deals that had been the subject of a non-binding but signed term sheet and had not yet gone to the final definitive agreement. We next worked through deals where there had been price exploration before the pandemic — now, how to reevaluate? As we conclude H1 and kick off H2, we are starting to see deals that originated during the pandemic.
While many believe M & A and fundraising are not possible in 2020, M & A professionals have the same requirements to deliver inorganic growth to their stakeholders as before, and H1 was slow — they are already behind the curve. H2 is do or die time and we would expect to see a significant uptick in M & A.
We know what must be done, but the devil is in the “how.” In the face of the “new normal” of working in solitude, dealmakers need to work harder to build trust and confidence through their communications over email, text, and calls, and increasingly use video meetings to create the feeling of personal experience. During these interactions, dealmakers will need to make sure they are:
- Punctual. More than showing up on time for calls and meetings, ensure that the video function is on whenever feasible, even for just a portion of the call or meeting. Honor commitments to deliver information and follow-up on a timely basis. Avoid making promises that have the potential of not being met.
- Clearly communicating the message. This means being transparent and authentic about goals and making sure that words and deeds are always consistent.
- Building trust over time, gradually. Babies learn to crawl before they walk and walk before they run. Similarly, outreach to potential deal counterparties should be gradual and allow for extra time for potential issues to be fully vetted and considered. Breaking a process into smaller steps can help. Take things at a measured pace to avoid spooking others. Be consistent. Consistency builds predictability and predictability leads to trust.
- Open. Be transparent and authentic; listen and give clear and respectful feedback to all of the parties. Giving mixed messages or telling different stories to different people can quickly engender mistrust and fear.
- Helpful. Words and deeds must be constructive, practical, and commercially minded, always. People trust people they consider to be beneficial.
- Emotive. People also trust people who show they care for others. Being open about emotions can help inspire true connection, a building block of trust.
- Team-promoting, not self-promoting. This means recognizing the efforts of other team members instead of claiming credit. Nothing creates mistrust like transparent self-promotion.
- Congruent. Words, deeds, and emotions must match. Acting with unity of purpose and belief, openly and transparently, helps to communicate authenticity and inspire trust. Sacrificing personal values can be viewed as sacrificing trust.
- Owning up to their mistakes. Humility does not have to be self-effacing. Owning up to missteps builds trust and encourages others to be forthcoming about their own stumbles.
These tips may seem soft, but they are effective in tough times. And though times are tough, they are filled with opportunities to be seized and realized.
- M&A is ramping up in H2 2020.
- Virtual interactions require extra care and feeding.
- 2020 buyers who pivot to survive this crisis will be poised to thrive when the economy bounces back.
- Fortune favors the bold.
The 2020 buyers that strategically determine how to survive this difficult economic time will be the ones most able to thrive once the economy bounces back.
Louis Lehot is the founder of L2 Counsel. Louis is a corporate, securities and M & A lawyer, and he helps his clients, whether they be public or private companies, financial sponsors, venture capitalists, investors or investment banks, in forming, financing, governing, buying and selling companies. He is formerly the co-managing partner of DLA Piper’s Silicon Valley office and co-chair of its leading venture capital and emerging growth company team.
L2 Counsel, P.C. is an elite boutique law firm based in Silicon Valley designed to serve entrepreneurs, innovative companies and investors with sound legal strategies and solutions.